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Define: Extrinsic Value

Extrinsic value of an option is the part of its price which decreases as expiration draws near. This is why extrinsic value is sometimes also known as "Time Value".

Extrinsic value of an option can be derived by subtracting the price of the option by its intrinsic value. Options that are out of the money have no intrinsic value and comprises only of extrinsic value. The price of Out of the money options consisting of only extrinsic value eventually declines zero if they remain out of the money by expiration.

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