What is intrinsic value?

The intrinsic value is the actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price for example what investors are willing to pay for the company and intrinsic value is the value. What the company is really worth. Different investors use different techniques to calculate intrinsic value.

Investing in options an intrinsic value is considered a bit differently. The amount by which a call option is in the money, calculated by taking the difference between the strike price and the market price of the underlier. For example, if a call option for 100 shares has a strike price of $35 and the stock is trading at $50 a share than the call option has an intrinsic value of $15 share, or $1500. If the stock price is less than the strike price the call option has no intrinsic value.

The amount by which a put option is in the money, calculated by taking the difference between the strike price and the market price of the underlier. For example, if a put option for 100 shares has a strike price of $35 and the stock is trading at $20 a share than the put option has an intrinsic value of $15 per share, or $1500. If the stock price is greater than the strike price the put option has no intrinsic value.

Video credits: Investor Trading Academy