Intrinsic vs Extrinsic Value

Breaking Down an Option's Price

Every option's price is made up of two pieces: intrinsic value and extrinsic value (also called time value). Understanding this split is how you know whether you're getting a good deal. And for the wheel, it explains exactly why selling OTM options is so powerful.

Intrinsic Value

Intrinsic value is the 'real' value -- what the option would be worth if you exercised it right now. It's simply how far in-the-money the option is. Out-of-the-money options have zero intrinsic value. Period.

Extrinsic Value (Time Value)

Extrinsic value is everything above intrinsic value. It's the market saying, 'There's still a chance this option could become more valuable before it expires.' It's driven by time remaining and implied volatility. Here's the key: extrinsic value decays to ZERO by expiration. Every penny of extrinsic value you sell eventually evaporates. That's how we make money.