Intrinsic Value
The portion of an option’s premium that would be realized if exercised right now.
Also called: in the money value
In plain language
For a call, intrinsic value is the current price minus the strike, floored at zero. For a put it is the strike minus the current price, also floored at zero.
Out-of-the-money options have zero intrinsic value. Their entire premium is extrinsic, which is another way of saying it can all disappear.
Intrinsic value moves essentially one-for-one with the underlying once an option is deep in the money.
The formula
Intrinsic Value
max(Price − Strike, 0) call · max(Strike − Price, 0) put
Why it matters
Intrinsic value is the part of the premium that is real and durable. Everything above it decays toward zero as expiration approaches.
Common mistakes
- Buying purely extrinsic value without recognizing it is a wasting asset.
- Assuming an in-the-money option cannot lose value. It can — the extrinsic portion still decays.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The part of an option’s premium beyond intrinsic value, reflecting time and volatility.
The price paid for an options contract.
An option that currently has intrinsic value.
An option with no intrinsic value, whose entire premium is time and volatility.
How much value an option loses per day purely from the passage of time.