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:
“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)
“It is not in our drawing-rooms that we should look to judge of the intrinsic worth of any style of dress. The street-car is a truer crucible of its inherent value.”
—Elizabeth Stuart Phelps (1844–1911)