The intrinsic value is the difference between the underlying price and the strike price, to the extent that this is in favor of the option holder. For a call option, the option is in-the-money if the underlying price is higher than the strike price; then the intrinsic value is the underlying price minus the strike price. For a put option, the option is in-the-money if the strike price is higher than the underlying price; then the intrinsic value is the strike price minus the underlying price. Otherwise the intrinsic value is zero.
In simple words, it is the value by which is already available in the market. If you are holding NIFTY 5000 Call (Bullish/Long) option and NIFTY is at 5050 level then you already have 50 Rs advantage even if the option expires today. These 50 Rs is the intrinsic value of option.
Conversely if you are holding a put option and NIFTY is below strike price then your option has an intrinsic value equalling the difference between the strike price and NIFTY value. So,
Intrinsic Value
- = Current Stock Price – Strike Price (Call Option)
- = Strike Price – Current Stock Price (Put Option)
Read more about this topic: Valuation Of Options
Famous quotes containing the word intrinsic:
“The permanence of all books is fixed by no effort friendly or hostile, but by their own specific gravity, or the intrinsic importance of their contents to the constant mind of man.”
—Ralph Waldo Emerson (1803–1882)
“There is no intrinsic worth in money but what is alterable with the times, and whether a guinea goes for twenty pounds or for a shilling, it is ... the labour of the poor and not the high and low value that is set on gold or silver, which all the comforts of life must arise from.”
—Bernard Mandeville (1670–1733)