Learn about intrinsic value

The intrinsic value of an option represents the value of the option when exercised. It is the difference between the strike price and the market price. Find out how to calculate the intrinsic value and how it is different for call and put options. 

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Premium & Valuation

Learn how the option price, or premium, is determined and calculated

As the holder of an option has a right, and the seller has a potential obligation, the holder needs to pay a certain amount of money to the seller. The price of the option, or the premium, is determined by two sets of variables: contract-specific variables and market-specific variables. Discover how these variables impact the price of an option and how option prices are calculated.

Premium & Valuation

Intrinsic value explained in detail

The difference between the exercise price, also called the strike price, and the (future) price of the underlying value is referred to as intrinsic value. The intrinsic value cannot be negative. A call option has intrinsic value when the price of the underlying value is higher than the strike price of that call option. A put option has intrinsic value when the strike price is higher than the price of the underlying value.

In the case of cash-settled options, at expiration, the strike price and settlement price of the underlying value are compared. In this case the intrinsic value is called the “pay-off” or “pay-out” of the contact.

Call option

A call option has intrinsic value if the current market price of the share is higher than the exercise price. In that case, the shares can be bought at a price lower than the price at which the shares can be sold.

Put option

A put option has intrinsic value if the current market price of the share is lower than the option’s exercise price. In that case, the shares can be sold at a price higher than the price at which they can be bought on the market.

A simple example clarifies this.

If a share is priced at € 35,
a call option with an exercise price of € 30 has an intrinsic value of € 5,
whereas a put option with an exercise price of € 38 has an intrinsic value of € 3.

The following terms are used when describing whether or not an option has intrinsic value:

In the money

The option has intrinsic value

Out of the money

The option does not have any intrinsic value

At the money

The option’s exercise price is more or less the same as the underlying value’s current market pric

Disclaimer

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