What is Intrinsic Value For Options?

Stock options (and options in general) are priced based on two valuations, implied volatility and intrinsic value.

With stock call options the intrinsic value is the amount the underlying stock is above the strike price of the call option. So for example, if a company called “Paid2Trade, Inc.”  is trading or valued at $110 per share, a call option that has not expired with a strike price of $100 will have an intrinsic value of $10 per share. This is because regardless of the time left and the volatility of the stock, the option will always have a fair value of at least $10 (and possibly a lot more). Sometimes options trade for less than fair value (as they near expiration day and depending on trading volume this can often is the case).

Option owners with options that are deep in the money (have a lot of relative intrinsic value) will often exercise the option instead of trying to sell it on option expiration day. This happens most often when the strike price is very thinly or not traded at all. Stock option market makers will often post bids below the intrinsic value to arbitrage the difference (they buy the options, exercise the stock option and sell the stock at the same time).

If the same stock option for Paid2Trade, Inc. has a strike price of $100 and the stock is trading for $90, the option has zero intrinsic value. An option cannot have a negative intrinsic value, but the further out of the money the stock option is (the lower the price of the stock relative to the strike price), the lower the relative price will be for the option.

Again, with the same stock option for Paid2trade, Inc. with a strike price of $100, the option will have $0 intrinsic value if the stock is trading right at $100.

The mirror image is true for put options. A put option will have greater intrinsic value the lower the price of the shares of a company trade for. If Paid2trade, Inc. is trading for $90 a share, a $100 strike price put option will have an intrinsic value of $10.

Robert Weinstein Google+