Extrinsic Value

Extrinsic value is everything in an option's price that is not intrinsic value — the premium paid for time remaining and for implied volatility. It is also called time value, and it is the part of the option that melts.

Two forces drain it: theta pulls it toward zero each day, and falling implied volatility deflates it all at once. Extrinsic value peaks for at-the-money options and shrinks as strikes move deep in or far out of the money. Option sellers are in the business of collecting extrinsic value; option buyers are in the business of outrunning its decay.