InvestorQ : What is the concept of intrinsic value when it comes to an option?
manisha Kolvenkar made post

What is the concept of intrinsic value when it comes to an option?

Answer
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Mahima Roy answered.
2 years ago


Every asset has an intrinsic value. For example, in case of an Rs.5 coin, the intrinsic value is the value of the metal in it. This intrinsic value is the embedded value in the asset irrespective of market expectations and government fiat. Similarly, in case of equity shares, the value of the net assets or the present value of the future cash flows can be interpreted as the intrinsic value of the stock. But what is intrinsic value of option? After all, options are just contracts and represent a right without the obligation to buy or sell an asset. How to calculate intrinsic value of option? Above all, how to apply the idea of intrinsic value of option in reality and how it impacts the market price. Let us also understand this intrinsic value versus market value debateā€¦