Intrinsic Value of Option

Intrinsic value is used in options to indicate the amount by which the option is in the money. The intrinsic value of the in the money call option is determined by taking the difference between the current trading price of the underlying asset and the strike price. An option has zero intrinsic value if it is out of the money or at the money. Only options that are in the money have an intrinsic value.

For a call option, if the stock price (S) exceeds the strike price (X), the option is in the money. the call owner exercises the option and receives (S-X). However, if S<=X, that is the call option is out of the money or at the money, then the intrinsic value of the option is zero. For a put option, if the stock price (S) is less than strike price (X), the option is in the money and the intrinsic value of the put option is (X-S). If S>=X for a put option, the intrinsic value is 0.

Example

For example, if a stock is trading at $35 and a call option’s strike price is $25, then the intrinsic value of the call option is $10 ($35-$25). For a put option of the same stock with a strike price of $45, the  intrinsic value is $10 ($45-$35).