Been trading for a while now but still get confused about intrinsic and extrinsic value.
I know intrinsic is the actual value if you exercised the option right now. But extrinsic value always trips me up.
How do you guys think about these when making trades? Feel like I’m missing something important here.
Extrinsic value consists of time premium and implied volatility. It approaches zero at expiration. Formula: Option Price = Intrinsic + Extrinsic. Monitor theta decay for optimal timing.
Extrinsic value is what you bet on for potential movement. It fades as expiration nears.
Extrinsic value is what traders pay for the chance an option might become profitable before it expires.
It’s made up of time value and volatility premium. OTM options are pure extrinsic value since they have zero intrinsic value.
This value drops fast as expiration approaches. That’s why timing matters so much with options.
Lost $800 on my first options trade buying way OTM calls with crazy high extrinsic value.
Extrinsic value is just hope and time wrapped up in a price. You’re paying for the chance something might happen.
Now I stick to options that already have decent intrinsic value. Way safer.
Extrinsic value is just the premium you pay for time and volatility. The market’s betting on how much an option could move before it expires.
For trading, watch how fast that premium decays. I stick with 30-45 days to expiration - gives you time for moves without paying insane premiums.
Patrick Boyle explains the math really well:
Here’s the thing - extrinsic value isn’t just wishful thinking. It’s calculated risk based on how much the stock actually moves. That’s why volatile stocks have expensive options even when they’re out of the money.