Option moneyness and Intrinsic and Extrinsic Value

Here are some points that explain the connection between option moneyness and intrinsic and extrinsic value –

For in-the-money options:

• Intrinsic value is positive

• Extrinsic value may or may not be present, depending on how much time is left until expiration and the volatility of the underlying asset

For at-the-money options:

• Intrinsic value is zero
• Extrinsic value is usually present, since there is still time left until expiration and uncertainty about the future price of the underlying asset

For out-of-the-money options:

• Intrinsic value is zero
• Extrinsic value is the entire option premium, since the option has no value based on the current price of the underlying asset

As an option moves from out-of-the-money to in-the-money:

• Intrinsic value increases
• Extrinsic value decreases, since there is less uncertainty about the future price of the underlying asset

Conversely, as an option moves from in-the-money to out-of-the-money:

• Intrinsic value decreases
• Extrinsic value increases, since there is more uncertainty about the future price of the underlying asset