Intrinsic Value

If the intrinsic value is negative, the intrinsic value is zero (because you wouldn’t exercise the option).

Example 1: Call Option (Right to Buy)

Let’s say you bought a Call Option with a Strike Price of ₹950, and currently, the stock is trading at ₹1,000.

Intrinsic Value = Current Stock Price – Strike Price
= ₹1,000 – ₹950
= ₹50

So, the Intrinsic Value is ₹50.
This means, if you exercise the option today, you can buy Axis Bank shares at ₹950 while the market price is ₹1,000 – giving you a profit of ₹50 per share.

How to Calculate Intrinsic Value?

The intrinsic value of an option represents the actual profit that would be earned if the option were exercised immediately. The calculation differs for call and put options.

For a Call Option

A call option has intrinsic value when the current market price is above the strike price.

For example, if the stock price is ₹1,000 and the strike price is ₹950, the intrinsic value is ₹50.

For a Put Option

A put option has intrinsic value when the strike price is above the current market price.

For example, if the strike price is ₹1,000 and the stock price is ₹950, the intrinsic value is ₹50.

If the calculation gives a negative result, the intrinsic value is considered zero because exercising the option would not be profitable.

Moneyness And Intrinsic Value

Based on the intrinsic value, options are divided into three types of contracts. This applies to both call options and put options.

Out-Of-The-Money Options

These options contracts have no intrinsic value. Exercising them would result in a loss.

• A call option is out of the money when the stock price is lower than the strike price.
• A put option is out of the money when the stock price is higher than the strike price.

At The Money Options

A call or put option is considered at the money when the stock price is the same as the strike price. In this case, the option does not have any intrinsic value because exercising it would neither result in a profit nor a loss. However, the option may still have a time value, as the stock price could move in a favourable direction before the option expires.

In The Money Options

The money options have intrinsic value because exercising them would give a profit. These options usually have higher premiums compared to other options because they have a lower chance of expiring worthless. A call option is in the money when the stock price is above the strike price, and a put option is in the money when the stock price is below the strike price.

Why Intrinsic Value Matters?

Intrinsic value is a very important part of an option’s pricing. It plays a key role in helping traders understand the worth of an option and make better decisions.

Intrinsic Value Sets Minimum Value

Intrinsic value is the actual money you will get if you exercise the option right now. This is why intrinsic value sets the minimum value of an option. Even if the time value becomes zero near expiry, the intrinsic value will still exist if the option is in the money.

Intrinsic Value Helps In Option Valuation

If an option is trading far above its intrinsic value, it could be overpriced, meaning traders are paying a lot for time value or volatility expectations. Intrinsic value helps traders judge whether an option’s premium is reasonable compared to its actual worth.

Risk Adjusting and Intrinsic Value

Intrinsic value helps traders understand the minimum worth of an option, but market risk and volatility also influence option pricing. Even if an option has intrinsic value, factors such as time remaining until expiry, volatility, and market sentiment affect the overall premium.

Options with higher intrinsic value are generally considered less risky because they already have built-in profit potential. However, traders still need to evaluate market conditions and time decay before making trading decisions.

Intrinsic Value Vs Time Value

The price of an option, called the option premium, is calculated like this:

Option Premium = Intrinsic Value + Time Value

Here is a table showing the differences between them

Calculating Intrinsic Value in Excel

Traders can calculate the intrinsic value of options easily in Excel by using simple formulas based on the stock price and strike price. This helps traders quickly analyse whether an option is In-the-Money (ITM), At-the-Money (ATM), or Out-of-the-Money (OTM).

1. Calculating Intrinsic Value for a Call Option

For a call option, intrinsic value exists only when the current stock price is higher than the strike price.

Formula Used in Excel

In this example, the call option has an intrinsic value of ₹50 because the stock price is trading above the strike price. If the calculation becomes negative, Excel automatically returns zero.

2. Calculating Intrinsic Value for a Put Option

For a put option, intrinsic value exists only when the strike price is higher than the current stock price.

Formula Used in Excel

Here, the put option has an intrinsic value of ₹50 because the strike price is above the market price.

Why Excel is Useful for Intrinsic Value Calculation?

Excel helps traders quickly calculate intrinsic value for multiple option contracts at once. It also makes it easier to compare different strike prices, analyse option chains, and identify ITM, ATM, and OTM contracts more efficiently.

Conclusion

Intrinsic value is an important part of understanding how options are priced. It shows the real value of an option based on the current stock price and helps traders know the minimum worth of their option. If an option is in the money, it has intrinsic value because exercising it would give a profit. If it is at the money or out of the money, it has no intrinsic value, but it may still have time value. 

Time value is the extra price traders pay for the chance that the stock price might move before expiry. Together, intrinsic value and time value make up the total option premium. Knowing intrinsic value helps traders check if an option is fairly priced and decide whether to exercise it. It is a key factor that protects traders from paying too much and helps them make better choices in the market.

Frequently Asked Questions (FAQs)

What is meant by Intrinsic value?

Intrinsic value is the real value of an option based on the difference between the current market price and the strike price. It represents the profit an option holder would earn if the option were exercised immediately.

How do you find the intrinsic value of an option?

The intrinsic value of an option is the profit you would get if you exercised it right now. For a call option, it is the stock price minus the strike price, and for a put option, it is the strike price minus the stock price. If the result is negative, the intrinsic value is zero.

How to calculate intrinsic value?

Intrinsic value is calculated by comparing the market price of the underlying asset with the strike price.

• For a call option: Market Price – Strike Price
• For a put option: Strike Price – Market Price

If the result is negative, the intrinsic value is considered zero.

Do OTM options have intrinsic value?

Out-of-the-money (OTM) options have no intrinsic value. A call option is OTM when the stock price is below the strike price, and a put option is OTM when the stock price is above the strike price. Exercising OTM options gives no profit, so their intrinsic value is zero.