Intrinsic Value
The intrinsic value (IV) of an option is the value of exercising it now. If the price of the underlying stock is above a call option strike price, the option has a positive monetary value, and is referred to as being in-the-money. If the underlying stock is priced cheaper than the call option's strike price, the call option is referred to as being out-of-the-money. If an option is out-of-the-money at expiration, its holder simply abandons the option and it expires worthless. Hence, a purchased option can never have a negative value. This is because a rational investor would choose to buy the underlying stock at market rather than exercise an out-of-the-money call option to buy the same stock at a higher-than-market price.
For the same reasons, a put option is "in the money" if it allows purchase of the underlying stock at a price below the current market price of the underlying stock. A put option is "out of the money" if the underlying stock can be bought on the market for less than the strike price of the put option.
As shown in the below equations and graph, the Intrinsic Value (IV) of a call option is positive when the underlying asset's spot price S exceeds the option's strike price K.
- Value of a call option:, or
- Value of a put option:, or
Read more about this topic: Option Time Value
Famous quotes containing the word intrinsic:
“To have that sense of one’s intrinsic worth which constitutes self-respect is potentially to have everything: the ability to discriminate, to love and to remain indifferent. To lack it is to be locked within oneself, paradoxically incapable of either love or indifference.”
—Joan Didion (b. 1934)
“The truth is that literature, particularly fiction, is not the pure medium we sometimes assume it to be. Response to it is affected by things other than its own intrinsic quality; by a curiosity or lack of it about the people it deals with, their outlook, their way of life.”
—Vance Palmer (1885–1959)