INTRINSIC VS. EXTRINSIC VALUE
Plain English
Intrinsic value is real, tangible value — the profit you'd lock in if you exercised right now. Extrinsic value is hope value — the extra amount you pay for the possibility that the stock moves more before expiration.
Going deeper
An option's premium consists of two components. Intrinsic value is the amount the option is in-the-money (for a call: stock price minus strike price; for a put: strike price minus stock price). Extrinsic value (also called time value) is everything else — it reflects time remaining, implied volatility, interest rates, and dividends. OTM options have zero intrinsic value; their entire premium is extrinsic. At expiration, extrinsic value drops to zero and only intrinsic value remains.
Examples
Breaking Down the Premium
Stock is at $105. A $100 Call is trading at $8.00. Intrinsic value = $105 - $100 = $5.00. Extrinsic value = $8.00 - $5.00 = $3.00. You're paying $5 for real value and $3 for time/volatility.
OTM Option
Stock is at $95. A $100 Call is trading at $2.00. Intrinsic value = $0 (stock is below strike). Extrinsic value = $2.00. The entire premium is 'hope' that the stock rises above $100 before expiration.