Looking confident and comfortable with both her long and short game despite windy conditions, the New Zealander shot a bogey-free six-under par 66 to reach 13-under for the tournament and lead South Korea's Kim Hyo-joo, who shot a 69.
Victory would secure Ko the LPGA's Player of the Year award as well as the $2 million top prize, the biggest in the history of women's golf.
The 60-player field at Tiburon Golf Club, with no-cut, is competing for a total purse of $7 million.
That's the kind of money that will help protect the LPGA from possible advances by the Saudi-backed LIV Golf Series should it consider venturing into women's golf.
On Friday, the LPGA announced a 33-event schedule for 2023 with a highest-ever $101.4 million in total season prize money and it is star quality, such as the South Korean-born Ko, which will be vital to hopes of further boosting the tour's profile.
Ko gained her fame in her years as a teen sensation but lost her form from 2018, failing to win a tournament for three years, but she looks back to her best this season, having won twice already.
Even if her mother sometimes jokingly question her progress, she feels she is back to her best, if not better.
"My mom does joke to me at times," Ko said. "She's like, 'You played so much better when you were, like, 15.'
"I was like, 'Thanks, Mom. OK, what am I meant to do with that information?'
"I don't know about better. I do know that I'm more experienced now."
Part of her development has been to learn to better handle setbacks and play with a calmness that she showed plenty of on Friday.
"I think I stayed really patient out there. With the wind being similar to Thursday I knew it could be tricky," she said.
"The goal for me is to not let one hole or one shot phase me.
"I am playing really freely now which is key. I think when I play freely, I am not tentative, I don't try to control the ball. I think it is a little more stress free and is better for me.
"Obviously, when the nerves kick in, that bit is a lot harder, but I think when I was struggling I was too tentative and trying to control the ball," Ko added.
Japan's Nasa Hataoka put herself in contention for the weekend, six behind Ko, but she undid her good work of three straight birdies on the back nine with bogeys on the 15th and 16th, ending with a five-under 67.
Hataoka is one of four players six shots off the lead along with Sweden's Anna Nordqvist, Scotland's Gemma Dryburgh, South Korea's Lee Jeong-eun and American Nelly Korda.
