Intrinsic Value
Intrinsic value is the real, built-in worth of an option: how much it is already in the money. Learn how to calculate it and why it is the part of the price that is not hope.
Intrinsic value is the real, built-in worth of an option right now. It is the amount the option is already in the money, the profit you would lock in if you could exercise it this instant.
Think of it as the part of an option's price that is not hope. It is money that already exists in the contract. Let me show you exactly where it comes from.
Real Value vs Hope Value
Every option's price is made of two ingredients: real value and hope value. Intrinsic value is the real part. It is the piece backed by the stock's actual price today, not by what might happen later.
Say a call lets you buy a stock at $100, and the stock is trading at $115. That call has $15 a share of intrinsic value, because your right to buy at $100 is genuinely worth $15 when the market price is $115. That $15 is real. It is baked in. Nobody can take it away just because time passes.
The rest of the option's price, anything above that $15, is hope value, known as extrinsic value. That part is a bet on the future, and it melts away as expiration nears.
How to Calculate It
The math is simple, and it never goes below zero.
For a call: intrinsic value is the stock price minus the strike, if that number is positive. Stock at $115, strike $100, gives $15. If the stock is below the strike, intrinsic value is just $0, never negative.
For a put: flip it. Intrinsic value is the strike minus the stock price, if positive. A $100 put with the stock at $90 has $10 of intrinsic value, because your right to sell at $100 is worth $10 when the market is at $90.
An option with intrinsic value is in the money. An option with zero intrinsic value is at or out of the money, and its entire price is hope value.
- Intrinsic value is how much an option is already in the money.
- It is the real value, the part of the price that is not hope.
- Call: stock minus strike. Put: strike minus stock. Never below zero.
- An out-of-the-money option has zero intrinsic value.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
A $100 call, stock trading at $115. What is the intrinsic value?
Call intrinsic value is stock minus strike: $115 minus $100 is $15 of real, built-in value.
A $100 call, stock trading at $90. What is the intrinsic value?
Intrinsic value never goes negative. Below the strike, a call has $0 intrinsic value, all hope.
Intrinsic value is which part of an option's price?
Intrinsic value is the real, in-the-money portion. The hope portion is extrinsic value, which decays.
Bottom Line
Intrinsic value is the honest core of an option's price: the money already inside it because the stock has moved past the strike. Calculate it with a quick subtraction, remember it can never dip below zero, and you can instantly separate what an option is really worth today from what you are simply hoping it becomes.
Keep going: the other half of the price is extrinsic value, and the two together make up the option premium.