Intrinsic Value - Options Investing E-learning

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. 

The difference between market and exercise price

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.

Intrinsic value of cash settled options

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.

The value of an option at expiration

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.

Example of intrinsic value

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 € 30 has no intrinsic value.

Another example based on the same share price

• a put option with an exercise price of € 38 has an intrinsic value of € 3,
• whereas a call option with an exercise price of € 38 has no intrinsic value.

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 price.