pricing
Intrinsic Value
The real, tangible value of an option if exercised immediately. Only in-the-money options have intrinsic value.
Formula
IV_call = max(S - K, 0) IV_put = max(K - S, 0)
Variables
- IV
- Intrinsic value (not implied volatility)
- S
- Current stock price
- K
- Strike price
Worked Example
Inputs
- S
- $105
- K
- $100
Calculation Steps
- 1
Call IV = max(105 - 100, 0) = max(5, 0) = 5 - 2
Put IV = max(100 - 105, 0) = max(-5, 0) = 0
Result: Call intrinsic = $5.00, Put intrinsic = $0.00
Intuition
Intrinsic value is the floor price of an option. A $100 call on a $110 stock must be worth at least $10 — otherwise you could buy the option, exercise, and sell the stock for free profit (arbitrage).