Extrinsic Value

When we pay the Option Premium, the Extrinsic Value is that Extra Price over that Option’s Intrinsic Value.

The general formula for Extrinsic Value is:

Extrinsic Value = Option Premium – Intrinsic Value

Example: AAPL Extrinsic Value (Call Option)

AAPL is trading at $99.97. We are interested to buy the AAPL July 90 Call. Calculate this option’s Extrinsic Value.

• Current Option Premium  = $18.45  (from AAPL Table above)
• Current Stock Price          = $99.27
• Option Strike Price           = $90
• Option Intrinsic Value      = $9.97  ($99.97 - $90.00)
• Option Extrinsic Value     = $8.48  ($18.45 – $  9.97)

The Option’s Extrinsic Value is a subjective value. This Extrinsic Value is determined by:
1. The Stock Price
2. Time alue (how much time is left on the option)
3. Volatility

In the above case, the extrinsic value of $8.48 priced in:
1. The high price of AAPL stock (around $100)
2. The option’s remaining life of 5 months
3. The volatility of AAPL shares

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