Extrinsic vs Intrinsic Value

Understanding the difference between intrinsic and extrinsic value is crucial for options pricing and trading decisions.

Intrinsic Value

The "real" value of an option.

For calls:

Intrinsic = stock price – strike price

For puts:

Intrinsic = strike price – stock price

Extrinsic Value

Everything else (time + volatility).

Extrinsic shrinks to zero at expiration. This is why option sellers profit from time decay (theta).

Key Insight

When you sell options, you're selling extrinsic value. As time passes, extrinsic value decays, and you can buy back the option for less than you sold it for—this is how income strategies work.

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