Extrinsic Value

Filed Under » ,
Dictionary Says

Definition of 'Extrinsic Value'

The difference between an option's market price and its intrinsic value. In theory, options should not trade above their intrinsic value due to the time value associated with option pricing.

Extrinsic value is also the portion of an item's worth that is assigned to it by external factors. The opposite of extrinsic value is intrinsic value, which is the inherent worth of an item.

Investopedia Says

Investopedia explains 'Extrinsic Value'

For example, an option that has a premium price of $10 and an intrinsic value of $6 would have an extrinsic value of $4. Denoting the amount by which the option's price is greater than the intrinsic value, all else equal, the extrinsic value of the option declines as its expiration date draws closer. A piece of residential real estate would have intrinsic value based on factors such as its age, condition, square footage and location. The fact that it is the seller's childhood home is part of the home's extrinsic value, and will not be factored into the price a buyer will pay for the home. In this situation, the extrinsic value of the home cannot be conveyed to any buyer except, perhaps, another family member.

Articles Of Interest

  1.

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.

  2. Employee Stock Options (ESO)

    Employee stock options are a form of equity compensation granted by companies to their employees and executives.

  3. Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.

  4. Conversion Arbitrage

    This stock/options combination helps traders take advantage of market mispricing. Find out how.

  5. The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).

  6. Basic Investment Objectives

    You might know about different asset types, but do you know how each type contributes to a particular goal?

  7. Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.

  8. Understanding And Playing The Dow Jones Industrial Average

    Learn strategies for investing in this price-weighted index and how to interpret its movements.

  9. Writing A Covered Call

    Writing an option is the process of selling to another investor the right, but not the obligation, to buy or sell a stock at a given price in the near future. It can also be referred to as shorting ...

  10. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  2. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  3. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  4. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  5. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

  6. Chartalism

    A non-mainstream theory of money that emphasizes the impact of government policies and activities on the value of money.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=cb75b84f7c433e7b27a329777a79ca8b