Intrinsic vs extrinsic value.
In plain English
An option's premium splits into intrinsic value and extrinsic value. Intrinsic value is what exercising right now would be worth, and it is never below zero. Extrinsic value, often called time value, is the rest of the premium, reflecting how much time remains and how much the underlying stock is expected to move. Extrinsic value decays as expiration approaches and disappears entirely at expiration, leaving only intrinsic value. An option with no intrinsic value is priced purely on the chance that it gains some before time runs out.
01Why it matters
A holder can be right about the direction of a stock and still lose money, because the extrinsic portion of the premium erodes every day regardless of direction.
02The math, step by step
A call with a $50 strike trades at $6.50 while the stock sits at $54. Intrinsic value is $54 minus $50, or $4.00. The remaining $2.50 is extrinsic value, and all of it is gone by expiration.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
In stock analysis, intrinsic value means an analyst's estimate of what a business is truly worth. In options it is a precise arithmetic figure: the difference between the strike and the current price, floored at zero. Same phrase, unrelated calculations.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice