Intrinsic value

Intrinsic value is the portion of an option's price that reflects its real, immediate value if exercised right now. It's the difference between the current stock price and the strike price, but only when that difference is positive.

Formula:

• Call intrinsic value = Max(Stock price − Strike price, 0)
• Put intrinsic value = Max(Strike price − Stock price, 0)

OTM options have zero intrinsic value. ATM options have zero intrinsic value. Only ITM options have intrinsic value.

Why it matters: Intrinsic value is the floor of an option's price. No option can trade below its intrinsic value, if it did, arbitrageurs would immediately buy the option and exercise it for a risk-free profit, eliminating the discrepancy.

Intrinsic value doesn't decay: Unlike extrinsic value (which erodes via theta), intrinsic value only changes when the stock price moves relative to the strike. Time passing doesn't reduce intrinsic value, only the stock moving does.

Deep ITM options are mostly intrinsic: A deep ITM call might have $25 of intrinsic value and only $0.50 of extrinsic value. This is why deep ITM options are sometimes used as stock replacements, they behave almost entirely like the underlying with very little time-decay drag.

Example: MSFT is at $430. The $410 call has $20 of intrinsic value. If it's trading at $22.50, the remaining $2.50 is extrinsic value. At expiration, if MSFT is still at $430, the $410 call will be worth exactly $20, pure intrinsic value.

Related terms: Extrinsic value, ITM, OTM, ATM, premium, delta

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