1. Intrinsic Value

This is the "in-the-money" portion of the option's premium. It exists only if the contract's terms are more favorable than the current market price. For calls, intrinsic value is the amount by which the underlying asset's price exceeds the strike price. For puts, it's the amount by which the strike price exceeds the underlying asset's price. Intrinsic value is the direct result of internal factors — mainly the relationship between the strike price and the market price of the underlying asset. In other words, intrinsic value represents executable value, if any.

2. Extrinsic Value

The extrinsic value is the portion of the premium that exceeds any intrinsic value the option may have. It's influenced primarily by two external factors: time value and implied volatility.

• Time Value: This reflects the additional value of the time left until the option's expiration. The more time until expiration, the higher the potential for the underlying asset to move in a favorable direction, thus the higher the time value. As you approach expiration, time value diminishes, simply as there is no time left. Time is a decaying factor, depleting the options premium. Therefore, negatively affects option buyers and benefits option sellers.
• Implied Volatility: This is a measure of the market's forecast of the underlying asset's potential to undergo price changes. High implied volatility means the market expects greater price movement, which increases the option's premium. Events like earnings announcements can cause implied volatility to spike because they introduce a likelihood of stock movement. Because of this expected movement, the options premium will be more expensive – and have an inflated premium. Post earnings announcement, the options premium may deflate because the anticipated movement already happened.