What is Intrinsic Value in Options?
Intrinsic value is the "real" portion of an option's price—the tangible profit embedded in the contract.
Quick Summary
Intrinsic Value is the immediate, tangible profit you would receive if you exercised an option right now. For calls: Stock Price − Strike Price. For puts: Strike Price − Stock Price. It can never be negative—the floor is always zero.
When you look at the price of an option (the Premium), you're looking at a single number. But that number is actually a sum of two very different things:
Option Premium = Two Parts
Every option price is composed of these components
Understanding the difference between these two is the single most important skill for option valuation. If you don't know how much of your premium is "real," you don't know what you're actually buying.
Let's start with the foundation: Intrinsic Value.
The Definition: What is Intrinsic Value?
THE CORE CONCEPT
Intrinsic Value = The profit you'd pocket if you exercised right now
It is the tangible, immediate value embedded in an option contract. It answers the question: "If this option expired today, what would it be worth?"
Important: Intrinsic Value can never be negative. It is either a positive number or zero.
How to Calculate Intrinsic Value
The math is simple. It is strictly the difference between the Stock Price and the Strike Price.
A Call gives you the right to buy low. It has value if the market price is higher than your strike.
Example
A Put gives you the right to sell high. It has value if the market price is lower than your strike.
Example
The "Zero Floor" Rule
What happens if the calculation comes out negative?
When Math Goes Negative
Why zero? An option is a right, not an obligation. If the trade is bad (Out of the Money), you simply don't use it. You let it expire. The lowest intrinsic value can ever be is zero.
Intrinsic Value by Moneyness
Why Intrinsic Value Matters for Risk
Intrinsic Value provides a "safety buffer."
If you buy an option for $5.00, and $4.00 of that price is Intrinsic Value, only $1.00 of your investment is susceptible to Time Decay.
Decay Vulnerability
Does NOT decay with time. Only changes if the stock price moves.
Does decay with time. Disappears completely at expiration.
Option Composition Comparison
Deep ITM vs OTM: What's at risk from time decay?
Deep ITM options are much more stable—less of the premium is exposed to time decay.
Frequently Asked Questions
Summary
Intrinsic Value is the "equity" in your trade. It is the part of the price that is real.
Intrinsic Value = Tangible profit. Stock price vs. strike price. Can never go negative. Does not decay with time.
When you see an option premium trading below its Intrinsic Value, an arbitrage opportunity exists (though in modern electronic markets, this is virtually impossible).
However, you will almost always see options trading above their Intrinsic Value. Why? Because of the second half of the equation: Extrinsic Value.
