Extrinsic value – literally the existing current option premium (price) minus its intrinsic value. Extrinsic value can be seen as the time premium and volatility premium value in an option price. Most of the time, all options has some extrinsic value no matter how small. However at option expiration by definition all options have zero extrinsic value.
This is probably best explained with two examples.
Example 1: In the money : if an IWM (General Market Russell 2000 Index ETF) is $100 and an in the money call option strike is $90 and assume option premium is $11. First workout the intrinsic value that would be $100 – $90 = $10. Then the extrinsic value would be option premium $11 – intrinsic value $10, that is $1 extrinsic value.
Example 2: Out of the money : if IWM is $100 and a call option strike is $110 and the option premium is $1. First workout the intrinsic value, that would be $100 – $110 = -$10 and so would be considered $0 intrinsic value. Then the extrinsic value would just be option premium $1 – intrinsic value $0, that is $1 extrinsic value. This is why out of the money options by definition only have extrinsic value (no intrinsic value).« Back to Glossary Index