Intrinsic Value and Extrinsic Value
Intrinsic Value
When an option is in-the-money, it has intrinsic value. For an in-the-money call, the intrinsic value is equal to the underlying asset price less the strike price. For an in-the-money put, the intrinsic value is equal to the strike price less the underlying asset price. If the option is out-of-the-money, it has no intrinsic value; its extrinsic value is equal to the price of the option.
Extrinsic Value
Extrinsic value is the time value of an option. It is equal to the option price less the intrinsic value of the option. Out-of-the-money options are composed entirely of extrinsic value; they have no intrinsic value.
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