Options Intrinsic Value: Understanding In-The-Money Value

When you look at an option's price, part of that price is intrinsic value - the real, tangible value you would get if you exercised the option right now. Understanding intrinsic value helps you evaluate options, calculate potential profits, and choose the right strikes. This guide explains everything you need to know.

What is Intrinsic Value?

Intrinsic value is the amount by which an option is in-the-money (ITM). It represents the immediate exercise value of the option - what you would receive if you exercised it and immediately closed the stock position.

Calculating Intrinsic Value for Calls

For call options, intrinsic value equals the stock price minus the strike price (if positive):

Call Intrinsic Value = Max(Stock Price - Strike Price, 0)

Calculating Intrinsic Value for Puts

For put options, intrinsic value equals the strike price minus the stock price (if positive):

Put Intrinsic Value = Max(Strike Price - Stock Price, 0)

Intrinsic Value vs Extrinsic Value

An option's total price (premium) is made up of two parts:

• Intrinsic value: Real, immediate value if exercised
• Extrinsic value: Time value plus volatility premium

Option Premium = Intrinsic Value + Extrinsic Value

Why Intrinsic Value Matters

1. Minimum Option Value

An option can never trade below its intrinsic value. If it did, arbitrageurs would immediately buy the option, exercise it, and sell the stock for a risk-free profit. This keeps option prices at or above intrinsic value.

2. Exercise Decisions

Intrinsic value determines whether exercising an option makes sense. Options with intrinsic value might be worth exercising, especially near expiration. Options without intrinsic value should never be exercised.

3. Assignment Risk

Options with high intrinsic value and low extrinsic value are at higher risk of early assignment. The option holder might exercise to capture the intrinsic value rather than waiting.

4. Evaluating Trades

Knowing the intrinsic value breakdown helps you understand what you are paying for. A deep ITM option with low extrinsic value behaves more like stock. An ATM option with all extrinsic value is a pure time bet.

Intrinsic Value and Moneyness

The relationship between intrinsic value and moneyness:

In-The-Money (ITM)

• Has positive intrinsic value
• Calls: stock price above strike
• Puts: stock price below strike

At-The-Money (ATM)

• Has zero or minimal intrinsic value
• Stock price equals or is very close to strike
• All or nearly all premium is extrinsic value

Out-of-The-Money (OTM)

• Has zero intrinsic value
• Calls: stock price below strike
• Puts: stock price above strike
• Entire premium is extrinsic value

How Intrinsic Value Changes

Intrinsic value changes dollar-for-dollar with the stock price (for ITM options):

• ITM call: Gains $1 intrinsic for every $1 the stock rises
• ITM put: Gains $1 intrinsic for every $1 the stock falls
• OTM options: Intrinsic value stays at zero until the option goes ITM

Intrinsic Value at Expiration

At expiration, an option's entire value is intrinsic value. All extrinsic value decays to zero. This means:

• ITM options: Worth exactly their intrinsic value
• ATM options: Worth nothing or nearly nothing
• OTM options: Expire worthless

Using Intrinsic Value in Trading

Deep ITM Options

Options that are deep in-the-money have mostly intrinsic value and little extrinsic value. These are useful for:

• Stock replacement strategies
• Minimizing time decay risk
• Getting stock-like movement with less capital

ATM Options

Options with zero intrinsic value (ATM/OTM) are used when:

• You want maximum leverage
• You are selling premium (collecting extrinsic value)
• You have a strong directional conviction

Intrinsic Value and Delta

There is a relationship between intrinsic value and delta:

• Deep ITM options (high intrinsic): Delta near 1.0 (or -1.0 for puts)
• ATM options (no intrinsic): Delta around 0.50
• OTM options (no intrinsic): Delta below 0.50, decreasing

Higher intrinsic value generally means higher delta, which means the option moves more like the stock.

Common Mistakes

• Confusing premium with intrinsic value: The option price includes both intrinsic and extrinsic value
• Thinking OTM options have negative intrinsic: Intrinsic value is never negative, just zero
• Ignoring intrinsic value changes: Intrinsic value moves dollar-for-dollar with ITM stock movement
• Exercising options without intrinsic value: Never exercise OTM options

Summary

Intrinsic value is the real, tangible value of an in-the-money option - the profit you would make if you exercised and immediately closed the position. It equals stock price minus strike for calls, and strike minus stock price for puts. Options can never trade below their intrinsic value, and at expiration, intrinsic value is all that remains. Understanding this concept helps you evaluate option prices and choose appropriate strikes for your strategies.

Want to learn more? Check out our guide on extrinsic value or learn about options moneyness.