InvestorQ : What is the Intrinsic Value of an option?
Bhavik Nehru made post

What is the Intrinsic Value of an option?

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Bhavik Nehru answered.
2 years ago


We often come across this term of intrinsic value of options and it applies to call options and to put options. The intrinsic value of an option is defined as the amount, by which an option is in-the-money (ITM), or the immediate exercise value of the option when the underlying position is marked-to-market. This is purely defined in terms of spot price of the stock. Let us understand the calculation of the intrinsic value of the option in greater detail. For a call option: Intrinsic Value = Spot Price - Strike Price For a put option: Intrinsic Value = Strike Price - Spot Price. Let us look at a Tata Steel 550 call option when the market price of Tata Steel is Rs.573 and a Tata Steel 550 put option when the market price of Tata Steel is at Rs.521. The intrinsic value of the call option will be Rs.23 (573-550) and the intrinsic value of the put option will be Rs.29 (550-521). The intrinsic value of an option must be a positive number or 0. It cannot be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than 0. For a put option, the strike price must be greater than the underlying asset price for it to have intrinsic value. The concept of intrinsic value of the option is very important when we understand how the option price is determined. Remember, intrinsic value is one side of the option premium. It has another perspective called time value. It is the sum of the time value and the intrinsic value of the option that makes up the option price of any strike on the stock or the index