Dissection of an Option Price Part II: Intrinsic and Extrinsic Value of Puts

The intrinsic and extrinsic value of puts and calls are similar. In cases of skew (to be explained in separate post), the puts can be priced higher than can calls in which case the extrinsic value of put is higher than the same for an equidistant call.

The formula remains pricing of  Option = Intrinsic Value + Extrinsic Value

The intrinsic value is the absolute difference between the strike price and current stock price. Intrinsic value of a call only exists for ITM strikes (which in the case of puts are strikes above the current price) and is 0 for OTM strikes.

​Extrinsic pricing follows the same methodology that it does with calls; extrinsic should be thought of as the extra incentive for offering an option to a buyer, and peaks at the current price, decreasing as the strike gets further ITM or OTM. Extrinsic is also called 'time value' or 'time premium'.

When you sell an option, it's the time value or the extrinsic that's decaying per day.  Conversely, if you are buying an option, you need a movement of the stock to overcome the daily decay of the time value of the option you own.