InvestorQ : How to measure the intrinsic value of a call option?
Mahima Roy made post

How to measure the intrinsic value of a call option?

Answer
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Aditi Sharma answered.
2 years ago


A call option is the right to buy an asset without the obligation to buy that asset. You agree to buy the asset at a price which is called the strike price. If the market price is above the strike price then the call option has a positive intrinsic value. If the market price is below the strike price then the call option has zero intrinsic value. Look at the formula below…

- Call Options: Intrinsic value = Underlying Stock's Current Price - Call Strike Price

- Time Value = Call Premium - Intrinsic Value

Let us break down this idea of intrinsic value of call option with a live example of different strikes and correlate with different market prices of the stock. Let us look at the price of Reliance…

Strike Price

CMP - 935

Intrinsic Value

Time Value

CMP-955

Intrinsic Value

Time Value

920 Call

26

15

11

54

35

19

930 Call

12

5

7

42

25

17

940 Call

8

0

8

23

15

8

950 Call

5

0

5

9

5

4

960 Call

2

0

2

6

0

6

In the above table, the pink shaded cells represent the out of the money (OTM) call options. In all the OTM options you will find that the intrinsic value of the option is zero and the premium of options is entirely represented by time value (expectations).