Intrinsic Value

The immediate exercise value of an options contract — the amount by which the option is in the money.

For a call option, intrinsic value equals the current stock price minus the strike price (when that number is positive). A call with a $50 strike on a stock trading at $55 has $5 of intrinsic value. For a put option, it equals the strike price minus the current stock price (when positive). A $50 put on a stock at $45 has $5 of intrinsic value. When an option is out of the money or at the money, intrinsic value is zero.

Intrinsic value cannot be negative — an option that is out of the money has zero intrinsic value, not negative intrinsic value. The option simply would not be exercised in that state. The total premium of any option is at a minimum equal to its intrinsic value; any premium above intrinsic value is the extrinsic (time) value.

At expiration, an option's entire value collapses to its intrinsic value — the extrinsic value is fully eroded by time decay. This is why options traders talk about "the race against time": option buyers need the position to gain intrinsic value faster than the time value decays, while option sellers benefit from the time value erosion as long as the option doesn't move deep into the money.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.