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What is Intrinsic Value and How Do you Calculate it?
What is Intrinsic Value?
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
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How Does Intrinsic Value Work?
Intrinsic value is a component of an option's total value (aka price or premium) and represents the inherent value if the option were to be exercised immediately. Here's how intrinsic value works for both call and put options.
Call Options: The intrinsic value of a call option is the difference between the current price of the underlying asset and the strike price of the option, if the underlying asset's price is above the strike price. If the underlying asset's price is below the strike price, the call option has no intrinsic value.
Put Options: The intrinsic value of a put option is the difference between the strike price of the option and the current price of the underlying asset, if the underlying asset's price is below the strike price. If the underlying asset's price is above the strike price, the put option has no intrinsic value.
What Affects Intrinsic Value?
The intrinsic value of an option is affected by two primary factors:
The price of the underlying asset: The intrinsic value of an option increases when the price of the underlying asset moves in a favorable direction. For call options, the intrinsic value increases as the price of the underlying asset rises above the strike price. For put options, the intrinsic value increases as the price of the underlying asset falls below the strike price.
The option's strike price: The strike price is the price at which the option holder can buy (for call options) or sell (for put options) the underlying asset. The further the strike price is in a favorable position relative to the current price of the underlying asset, the higher the intrinsic value of the option.
How to Calculate Intrinsic Value?
The intrinsic value of call and put options can be calculated using the following formulas:
Call Options
Intrinsic value of a call option is the difference between the current price of the underlying asset and the strike price of the option, if the underlying asset's price is above the strike price. If the underlying asset's price is below the strike price, the call option has no intrinsic value.
Put Options
The intrinsic value of a put option is the difference between the strike price of the option and the current price of the underlying asset, if the underlying asset's price is below the strike price. If the underlying asset's price is above the strike price, the put option has no intrinsic value.
Intrinsic Value Example in Stocks
Imagine you have a call option with a strike price of $90, and the current price of the underlying asset is $100. To calculate the intrinsic value, we just take the difference between the ITM strike price and the current price of the asset:
$100 (underlying price of the stock) - $90 (strike price) = $10.00 Intrinsic Value.
In this image, you can see that the total option’s value is $12.50. If we know $10.00 of this is intrinsic value, the remaining $2.50 is extrinsic value.
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This same concept can be applied to put options as well. Let’s say you have a $100 strike put contract instead, when the stock is trading at $90. The ITM put contract would have $10.00 of intrinsic value as well. $100 (strike price) - $90 (underlying price of the stock) = $10.00 Intrinsic Value.
Intrinsic Value vs Extrinsic Value: What Are the Differences?
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
Extrinsic value is sometimes referred to as “time value” because it reflects the possibility that an option may become ITM before expiration.
Intrinsic Value Summed up
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
What is the intrinsic value in options?
Intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
Which options have the most intrinsic value?
Intrinsic value represents the "in-the-money" portion of an option's premium. The options with the most intrinsic value are those that are most deeply in-the-money.
What is the formula for intrinsic value of options?
The intrinsic value of call and put options can be calculated using the following formulas:
Call Options
Intrinsic value of a call option is the difference between the current price of the underlying asset and the strike price of the option, if the underlying asset's price is above the strike price. If the underlying asset's price is below the strike price, the call option has no intrinsic value.
Put Options
The intrinsic value of a put option is the difference between the strike price of the option and the current price of the underlying asset, if the underlying asset's price is below the strike price. If the underlying asset's price is above the strike price, the put option has no intrinsic value.
Do out-of-the-money (OTM) options have intrinsic value?
No, out-of-the-money (OTM) options do not have intrinsic value. The entire value of an OTM option is extrinsic value because these options have no intrinsic value.
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