Intrinsic value (options)
Also known as: in-the-money value
Intrinsic value is the amount by which an option is in the money. For a call, it equals the stock price minus the strike price; for a put, the strike price minus the stock price. Intrinsic value is never less than zero.
An option's intrinsic value is the profit built into the contract if it were exercised immediately — in other words, how far in the money it is. A call option has intrinsic value when the market price of the stock is above the strike price; a put option has intrinsic value when the market price is below the strike price.
The math is simple subtraction. If a stock trades at $55, a 50 call has $5 of intrinsic value ($55 − $50), while a 50 put has none. If the same stock fell to $45, the 50 put would have $5 of intrinsic value ($50 − $45) and the call would have none. At-the-money and out-of-the-money options always have zero intrinsic value — it can never be negative.
Intrinsic value explains one piece of an option's premium. The rest is time value: premium = intrinsic value + time value. A 50 call trading for $7 when the stock is at $55 has $5 of intrinsic value and $2 of time value, reflecting the chance the option becomes more valuable before expiration. As expiration approaches, time value decays toward zero, leaving only intrinsic value.
Options questions on the SIE, Series 6, and Series 66 exams regularly require splitting a premium into intrinsic value and time value, or determining whether a contract is in, at, or out of the money. Memorize the two formulas — call intrinsic value = stock price − strike, put intrinsic value = strike − stock price — and remember the floor of zero.
Key takeaways
- Intrinsic value measures how far in the money an option is, and it is never negative.
- Call intrinsic value = stock price − strike price; put intrinsic value = strike price − stock price.
- Premium = intrinsic value + time value, so time value is whatever remains after subtracting intrinsic value.
- At-the-money and out-of-the-money options have zero intrinsic value.
- The SIE, Series 6, and Series 66 exams test splitting an option premium into intrinsic and time value.