Intrinsic Value of Stock Options

Intrinsic Value of Stock Options

See Also:
Finance Beta Definition
Black Sholes Option Model
Binomial Options Pricing Model
Employee Stock Ownership Plan (ESOP)
Subscription (Preemptive) Rights

Intrinsic Value of Stock Options

The intrinsic value of stock options is one of the factors – along with time value – that contribute to the value of a stock option. For an in-the-money stock option, intrinsic value is the difference between the strike price and the price of the underlying stock. For an option that is at-the-money or out-of-the-money, the intrinsic value is zero. An option’s intrinsic value cannot be negative, because if the option is not worth anything, the option holder would not exercise it.

Intrinsic Value – Call Option

For an in-the-money call option, the intrinsic value equals the price of the underlying stock minus the option’s strike price. (If the stock option is at-the-money or out-of-the-money, then the intrinsic value is always zero.) Use the following equation to calculate the call option:
Call Option Intrinsic Value = Stock Price – Strike Price

Intrinsic Value – Put Option

For an in-the-money put option, the intrinsic value equals the stock option’s strike price minus the price of the underlying stock. (If the option is at-the-money or out-of-the-money, the intrinsic value is always zero.)
Put Option Intrinsic Value = Strike Price – Stock Price
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Intrinsic Value of stock options

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