Extrinsic Value (Time Value)
The part of an option’s price that comes from time and volatility, not real value yet.
Extrinsic value is everything in an option’s price that is not intrinsic value. It is driven by time left (theta) and implied volatility (vega), and it decays to zero by expiration. Option sellers are, in effect, selling extrinsic value and collecting it as it decays.
For example
An out-of-the-money put trading at $0.60 is all extrinsic value. If the stock does not fall, that $0.60 bleeds away to nothing by expiration, which is the seller’s profit.
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