Course · Act I: Read the Chain · Chapter 2
Intrinsic and extrinsic option value
How an option’s premium splits into intrinsic value and extrinsic value, and why an out-of-the-money call can still change price before it expires.
Key terms
- Intrinsic value
- What an option is worth if it expires immediately. Stock minus strike for a call, and never below zero.
- Extrinsic value
- Premium minus intrinsic value. The part you pay for time and for how large a move might be.
- Moneyness
- In, at, or out of the money: whether the strike is already on the right side of the stock.
“Premium Is Two Numbers” is part of the full course: 6 puzzles on intrinsic and extrinsic option value. RocketCo is fictional, and none of this is a trade. Try this act’s free chapter, “Calls, Puts, and the Contract”, first.
“Premium Is Two Numbers” is in Act I: Read the Chain. 6 puzzles, unlimited retries.
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