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Intrinsic and Extrinsic

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The value of an option can be viewed as the sum of its intrinsic value and extrinsic value.

The intrinsic value is the value of an option if it expires at present, which is equal to its ITM amount. In another words, for ITM options, its intrinsic value is equal to the absolute value of (stock price - strike). For ATM or OTM options, its intrinsic value is equal to 0.

The extrinsic value is the time premium of an option, representing the difference between the option value expiring at maturity and at present. The extrinsic value of an option depends on its time to maturity, implied volatility and distance from the stock price. Option values increase as DTE increase or implied volatility increase or both. For ITM options, option values increase with wider spreads between stock price and strike. For OTM options, option value decreases with wider spreads between stock price and strike.

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