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Extrinsic Value is everything that makes up the current price of an option that does not relate to the differential between the Strike Price and the market price of the Underlying. As described in the Intrinsic Value definition, if a Call Option has a Strike Price that is above the market value of the instrument or commodity then it has no Intrinsic Value (and the opposite is true of Put Options). Until they expire, however, Options with no Intrinsic Value are not worthless and the differential between their Market Price and their Intrinsic Value defines their Extrinsic Value. The additional components which contribute to Extrinsic Value are:

Time Value - how Long the option has to Expiry
Implied Volatility - the extent to which the value might go up or down over time

Extrinsic Value gradually diminishes to zero as Expiration approaches. Option contracts must have Intrinsic Value to be worth exercising on or before their Expiration date.
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Contributed by: Ralph Windsor

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