Extrinsic Value
The portion of an option premium above its intrinsic value, representing time value and volatility premium.
Explanation
Extrinsic value is influenced by time to expiration, implied volatility, and interest rates. ATM options have the highest extrinsic value. As expiration approaches, extrinsic value decays to zero (time decay). Higher implied volatility increases extrinsic value.
Example
AAPL is at $155. A 150-strike call is priced at $7.50. Intrinsic value is $5.00, so extrinsic value is $2.50.