Options Pricing
Intrinsic Value
The immediate exercise value of an option, floored at zero (cannot be negative).
Formula
Call IV = max(S − K, 0) | Put IV = max(K − S, 0)
Variables
S- Current stock price
K- Strike price
Worked Example
Scenario: Stock at $108, call strike $100: intrinsic = max(108 − 100, 0) = $8. Put strike $110: intrinsic = max(110 − 108, 0) = $2.
Steps:
- For calls: subtract strike from stock price
- For puts: subtract stock price from strike
- If result is negative, intrinsic value is zero
When to Use This Formula
- Understand option moneyness (ITM/ATM/OTM)
- Decompose option premium into intrinsic and time value
- Evaluate exercise decisions
Limitations & Assumptions
- Ignores time value and volatility
- Does not indicate whether an option is a good trade
- Exercise is not always optimal even when intrinsic value exists
Common Questions
Can intrinsic value be negative?
No. Exercise value is floored at zero. An OTM option has zero intrinsic value.
Why does an in-the-money option cost more than intrinsic value?
Time value. An option has time remaining for further upside (for calls) or downside (for puts), adding premium above intrinsic.
Option pricing, payoff and the Greeks
- Time value formulaFormula
- Break-even formulaFormula
- Intrinsic valueDefinition
- Time valueDefinition
- RhoDefinition
Reference note: This is an educational mathematical reference. The formula's applicability depends on assumptions, market conditions, and use case. Always verify results independently and consult domain experts for decisions.