EXTRINSIC VALUE & ITS MEANING

Extrinsic value is one of the main components to options trading. We simplify the concept and how it fits when trading options in our video below.

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  • kenneth.w.cox@att.net says:

    Extrinsic value explanation is a bit confusing as I didn’t quite understand the context. I understood how to calculate the value and the definition on what it is was is clear – what is not clear is the context for which this metric is important relative to an option and why its important to consider it other than there’s a mysterious “time” decay but I am not making the connection on this.. The author does state it’s important, but not really sure why relative to time other than it appears to lose value over time relative to volatility – which is confusing…. for example, strike price is important in calculating the potential profit when a call moves in your direction relative to ITM and current price – that’s what you can make, but extrinsic value is a little more confusing as to why this is important relative to the trading option price, IV and time – I am hoping this is covered later in the course with a specific example of these components coming together to paint a bigger picture – otherwise, the course is great and learning a lot!

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