Intrinsic Value
Amount option is ITM
What is Intrinsic Value?
Intrinsic Value Intrinsic value is the amount by which an option is in-the-money — the portion of the premium that represents real, exercisable value. For a call option, intrinsic value equals max(0, stock price − strike price). For a put option, intrinsic value equals max(0, strike price − stock price). Intrinsic value can never be negative. Examples: - Call with strike $100, stock at $115: intrinsic = $115 − $100 = $15. - Call with strike $100, stock at $90: intrinsic = $0 (OTM). - Put with strike $100, stock at $90: intrinsic = $100 − $90 = $10. - Put with strike $100, stock at $115: intrinsic = $0 (OTM). Intrinsic value is what you would receive if you exercised the option immediately. A $15-intrinsic call lets you buy the stock at $100 and sell at $115, locking in $15 per share. In practice, most options are closed (sold to a buyer) rather than exercised — but the intrinsic value sets the floor on what the option must be worth. Intrinsic value cannot decay. It's a function of where the stock is now vs the strike. Theta only erodes the extrinsic (time-value) component of premium. This is why deep ITM options have stable prices that track the underlying closely — most of their premium is intrinsic, not subject to time decay. The relationship between intrinsic and extrinsic value across moneyness: - **Deep ITM**: high intrinsic, low extrinsic. Option behaves like the underlying stock. Delta near 1.0 (calls) or -1.0 (puts). - **At-the-money**: zero intrinsic (or very small), maximum extrinsic value as a percentage of premium. - **Out-of-the-money**: zero intrinsic, low absolute extrinsic. The cheapest options per contract but with low probability of finishing ITM. For traders, intrinsic value is the safe portion of premium. If you buy an ITM call, the intrinsic component is protected from time decay — only the smaller extrinsic component can be lost to theta. This is why LEAPS calls (deep ITM, long-dated) behave so similarly to owning stock with leverage. Early exercise is generally only profitable on options with substantial intrinsic value, and even then rarely for American-style equity options outside of dividend-related early exercise on deep ITM calls. The math: exercising early forfeits the remaining extrinsic value. Selling the option captures both intrinsic and extrinsic; exercising captures only intrinsic.
Complete Definition
Intrinsic value is the amount by which an option is in-the-money — the portion of the premium that represents real, exercisable value. For a call option, intrinsic value equals max(0, stock price − strike price). For a put option, intrinsic value equals max(0, strike price − stock price). Intrinsic value can never be negative. Examples: - Call with strike $100, stock at $115: intrinsic = $115 − $100 = $15. - Call with strike $100, stock at $90: intrinsic = $0 (OTM). - Put with strike $100, stock at $90: intrinsic = $100 − $90 = $10. - Put with strike $100, stock at $115: intrinsic = $0 (OTM). Intrinsic value is what you would receive if you exercised the option immediately. A $15-intrinsic call lets you buy the stock at $100 and sell at $115, locking in $15 per share. In practice, most options are closed (sold to a buyer) rather than exercised — but the intrinsic value sets the floor on what the option must be worth. Intrinsic value cannot decay. It's a function of where the stock is now vs the strike. Theta only erodes the extrinsic (time-value) component of premium. This is why deep ITM options have stable prices that track the underlying closely — most of their premium is intrinsic, not subject to time decay. The relationship between intrinsic and extrinsic value across moneyness: - **Deep ITM**: high intrinsic, low extrinsic. Option behaves like the underlying stock. Delta near 1.0 (calls) or -1.0 (puts). - **At-the-money**: zero intrinsic (or very small), maximum extrinsic value as a percentage of premium. - **Out-of-the-money**: zero intrinsic, low absolute extrinsic. The cheapest options per contract but with low probability of finishing ITM. For traders, intrinsic value is the safe portion of premium. If you buy an ITM call, the intrinsic component is protected from time decay — only the smaller extrinsic component can be lost to theta. This is why LEAPS calls (deep ITM, long-dated) behave so similarly to owning stock with leverage. Early exercise is generally only profitable on options with substantial intrinsic value, and even then rarely for American-style equity options outside of dividend-related early exercise on deep ITM calls. The math: exercising early forfeits the remaining extrinsic value. Selling the option captures both intrinsic and extrinsic; exercising captures only intrinsic.
Example
AAPL at $200, $180 call trading at $22.30. Intrinsic value = max(0, $200 − $180) = $20. Extrinsic value = $22.30 − $20 = $2.30. The $2.30 extrinsic decays toward zero by expiration; the $20 intrinsic stays as long as AAPL stays above $180.
Related Terms
Frequently Asked Questions
What is intrinsic value in options?
Intrinsic value is the amount by which an option is in-the-money. For calls: max(0, stock − strike). For puts: max(0, strike − stock). It's the portion of premium that represents real, exercisable value and can never decay below its current level (only changes when the stock moves).
Can intrinsic value go negative?
No — intrinsic value is bounded at zero. An option is either in-the-money (positive intrinsic) or out-of-the-money (zero intrinsic). The formula max(0, ...) ensures intrinsic value never drops below zero.
What's the difference between intrinsic and extrinsic value?
Intrinsic value is the ITM amount (fixed by current stock price). Extrinsic value is the rest of the premium — time value plus IV component. Extrinsic decays to zero by expiration via theta; intrinsic doesn't decay (it just tracks the stock price). At expiration, an option's price equals its intrinsic value only.
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