Extrinsic value

Also called Time value, extrinsic premium

The part of an option's price above its intrinsic value; the part that decays to zero by expiration.

An option's price splits in two:

• Intrinsic value: what it would be worth exercised now. A call's is spot − strike when that's positive; a put's is strike − spot. Out of the money, it's zero.
• Extrinsic value: the rest, the price of time and of the chance of a bigger move.

extrinsic = max(premium − intrinsic, 0)

Extrinsic value is what theta eats. It's highest at the money and shrinks to zero by expiration.

Why the wheel counts only this

Sell an in-the-money covered call and part of the premium is intrinsic value you'll hand back when the shares are called away below the price. Only the extrinsic part is income. Wheel and income counts income that way and says how much intrinsic value a pick leaves out ("income excludes $221 intrinsic").