Extrinsic Value measures the difference between the market price of an option, called the premium, and its intrinsic value. Intrinsic value is what you would get if you cashed in your option today. Extrinsic value measures how much more an option is worth than just its intrinsic value.It can be thought of as a measure of time preference: how much sooner do people want their money? The extrinsic value will be highest when the option has only a short time until it expires (i.e., when there is less time for things to change). It will also be high when there is a lot of uncertainty about what will happen to the underlying asset.For example, if Company A announces that it plans to buy Company B, then the stock prices of both companies are likely to change a lot in the next few months. If you own options on either company's stock, then your extrinsic values are going to go up.
