Intrinsic vs Extrinsic Value (5mins.) | Options for Beginners

Unlike stocks, options have an expiration date and so because they have a finite lifespan, all else being equal, their value will decay over time.

For this reason, an option's premium (price) is composed of two distinct components: Intrinsic value and time, or extrinsic value.

This video defines and breaks down the difference, with two very simple examples, in under 5 minutes...

Video Chapters:

0:00 Intro.
0:24 The two components of an option's price: intrinsic & extrinsic value.
0:43 What is intrinsic value?
0:49 What is extrinsic value?
1:05 Intrinsic & extrinsic components of a call option's price.
2:26 Intrinsic & extrinsic components of a put option's price.
3:11 Factors affecting extrinsic value.
3:39 Summary.
4:12 Outro.

#IntrinsicValue #ExtrinsicValue #Options

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DISCLAIMER: This channel is designed for informational and entertainment purposes only and should not be seen as providing professional investment advice.

[TheOptionAlchemist]

If you have any questions in regard to intrinsic/extrinsic value, or feedback on the video in general, please drop them in the comments below. I answer them all personally. Cheers!

[pratikp]

Hi, I recently faced issue when I bought option and underlying moved in my direction still option premium reduced. And whole day was like it. I concluded it was dropping IV is the culprit, as i faced same thing with next expiry ( it wasn’t time decay). Can you pls guide me to avoid this.
Details - i buy slightly OTM option. I am a scalper, in and out from trade within 5 mins.

Shall i go with ITM option so IV won’t hurt much, as i gain more on delta? OR is it risky to go ITM ?

Your valuable input will be highly appreciated.

[Thesoulutionist]

Thanks for making this so easy to understand. Do you teach how to buy options? I know a lot but keep making some mistakes and losing money.