Intrinsic value is what an option would be worth if you exercised it this second: for a call, stock price minus strike, and never less than zero. Extrinsic value is everything you paid above that: the price of time and possibility, and it always goes to zero by expiration.
Every option premium is exactly these two parts and nothing else. Intrinsic is arithmetic: compare the stock price to the strike, and if the option is on the right side of it, the difference is real, bankable value. It cannot go below zero, because an option is a right, not an obligation: if exercising would lose money, you simply do not exercise. That makes intrinsic value a hard floor under the price.
Extrinsic value is softer stuff. It is what the market charges for what might still happen before expiration: time on the clock and the chance of a move in your favor. Traders call it time value, and it has one fixed destiny: whatever it is today, it is zero on expiration day. The only question is how fast it melts on the way there.
The numbers
The stock trades at $100. The $105 call costs $3.00. Exercise it now and you would be paying $105 for a $100 stock, which is a gift to the seller, not value. Intrinsic: zero. The entire $3.00 is extrinsic: you paid three dollars for time and hope, and nothing for value in hand. Every out of the money option is like this: 100 percent extrinsic, a price made purely of maybe.
Now the $95 call at $7.00. Exercise today and you buy at $95 what sells for $100: five dollars of real value. So $5.00 of the price is intrinsic and the remaining $2.00 is extrinsic. You paid seven, but only five of it is value you could bank this afternoon. The other two dollars are rent on the calendar, and the lease always runs out.
Where it bites
"I paid $7, so I own $7 of value." No: you own $5. The $2.00 of extrinsic inside that in the money call is guaranteed to evaporate by expiration. If the stock goes nowhere, you do not break even; you lose exactly the extrinsic. Part of every option's price is a melting ice cube, and no outcome lets you bank it.
Sellers live off exactly that melt. The whole premium-selling business is collecting other people's extrinsic and waiting for the calendar to do the work. Every dollar of time value a buyer overpays is a dollar some seller plans to keep. Know which side of the melt you are standing on before you trade.
Mostly-extrinsic plus little time left is the fastest bleed. Decay is not a straight line: theta accelerates into the final weeks. A cheap, short-dated out of the money option is close to 100 percent extrinsic dying at maximum speed, which is why "lottery ticket" buys near expiration lose so reliably.
Go feel it
Watch your own premium melt in real time in the Time Decay lesson, then stand on the other side, as the seller harvesting a buyer's extrinsic, in The Premium Trap.
Related concepts: ITM, OTM, ATM · option premium · theta decay