Extrinsic Value

What is '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.

BREAKING DOWN '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.

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RELATED FAQS
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    Understand why the concept of intrinsic value is important for options traders and how they can use it to estimate what a ... Read Answer >>
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    See why the concept of intrinsic value is so important in options trading and how investors use it to evaluate the worth ... Read Answer >>
  3. What is the difference between intrinsic value and current market value?

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  4. Do you always have to consider intrinsic value when purchasing a stock? Why or why ...

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