Intrinsic value of an option

 

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Intrinsic value of an option

The amount by which an option is in the money. An option that is not in the money has no intrinsic value.



Intrinsic value of an option

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Intrinsic value

Intrinsic value

The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise. See also: In-the-Money, Time Value Premium, Parity.


Intrinsic value

Intrinsic value

An expression used in options and warrants trading which indicates the difference between the exercise price of the option/warrant and current price of the underlying instrument (shares, an index, commodity etc). As such it shows how much the options or warrants would be worth if exercised immediately.A call option/warrant has intrinsic value if the exercise price is below the share price, because it means that the holder of the option can buy shares in, e.g. Company X for 70p when they are trading at 82p. In such a situation it is said to be ' in the money' and has intrinsic value of 12p. If the share price is lower than the exercise price, the call option has no intrinsic value and the option is said to be out of the money.For put options and warrants, which give the holder a right to sell the shares, the situation is the other way round. The option has intrinsic value if the price of the underlying share is lower than the option price, because it means that the option holder can sell shares at 82p when they are trading at 70p (for example). Again, the intrinsic value would be 12p. Conversely, a put option is out of the money if the share price is higher than the option exercise price.For value investors, intrinsic value has a slightly different meaning. It is an estimate of the true worth of a company based on an analysis of its current and projected future earnings and how that relates to its share price.




 
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