Definition of Extrinsic Value

What is Extrinsic Value

Extrinsic value refers to the current option price less the intrinsic value of an in-the-money (ITM) option if exercised immediately. If the option contract is out-of-the-money (OTM), the extrinsic value is equal to the current option price so if a stock is priced at $50 and the put option strike price is $45, the extrinsic value of that contract is $5.

The extrinsic value of an options contract is the less tangible part of the options price and it is determined by factors other than the value of the underlying asset. Extrinsic value is the part of the option price that accounts for the risk being taken by the underwriter of the option.

Extrinsic value is also known as time value since time is one of the main factors that affects extrinsic value as an option contract moves closer to expiration but other factors that influence the value include interest rates, dividends and volatility.

GlobEx Markets Financial Dictionary of Terms, Phrases and Concepts

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Related Investment Terms

At-the-Money (ATM) Option

In-the-Money (ITM) Option

Out-of-the-Money (OTM) Option