Time to expiration: One of the most influential factors is the time remaining until the option expires. The more time left, the higher the extrinsic value tends to be, as there’s more opportunity for the underlying asset’s price to move in a favorable direction. As the option approaches its expiration date, the extrinsic value gradually decreases, a process known as time decay.
Implied volatility: Volatility measures how much an asset’s price is expected to fluctuate. Higher implied volatility increases the extrinsic value because the potential for significant price movement raises the likelihood of the option becoming profitable. For example, options on stocks that frequently experience price swings generally have higher extrinsic values due to increased volatility.
Interest rates: Interest rates can also impact extrinsic value. Higher interest rates can increase call option premiums slightly. That’s because holding the option instead of the underlying asset becomes more attractive due to the cost of capital.
Dividends: For options on dividend-paying stocks, the expected dividend payouts can influence extrinsic value. Dividends can reduce the price of call options and increase the price of put options, as they affect the underlying asset’s value during the option’s lifetime.