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Optionsbeginner

Intrinsic Value

Intrinsic value is the payoff an option would deliver if exercised immediately. For a call, IV=max⁡(S−K,0)\text{IV} = \max(S - K, 0). For a put, IV=max⁡(K−S,0)\text{IV} = \max(K - S, 0). It is always non-negative, equals zero for OTM and ATM options, and gives the lower bound on the premium of an American option. Anything the option trades above intrinsic value is time value.

Why it matters

Intrinsic value is the hard-cash core of an option. It tells you what the contract is worth right now if you had to settle it instantly. Above this floor, the market adds extra premium for the chance that things move further in the buyer's favour. As expiry approaches, the time-value layer melts off and the option price converges down to its intrinsic value. At the final tick, premium equals intrinsic value.

Formulas

Call intrinsic value
IVcall=max⁡(S−K,0)\text{IV}_{\text{call}} = \max(S - K, 0)
Strictly positive when S>KS > K, zero otherwise. Maxing with zero ensures the value never goes negative.
Put intrinsic value
IVput=max⁡(K−S,0)\text{IV}_{\text{put}} = \max(K - S, 0)
Strictly positive when S<KS < K, zero otherwise. The mirror of the call expression.

Worked examples

Scenario

A call on CSL has strike K=K = 40$ and the stock trades at S=S = 47$. The market premium is $9.

Solution

Intrinsic value =max⁡(47−40,0)== \max(47 - 40, 0) = 7$. Time value =9−7== 9 - 7 = 2$. The $7 is what the holder would pocket by exercising now. The extra $2 is paid for the chance that CSL rises further before expiry.

Scenario

A put on Telstra has K=K = 4.00$ and the stock trades at S=S = 4.30$. The premium is $0.15.

Solution

Intrinsic value =max⁡(4.00−4.30,0)== \max(4.00 - 4.30, 0) = 0$. Time value =0.15−0== 0.15 - 0 = 0.15$. The put is OTM and has no exercise value today, but the market still pays 15 cents for the chance that Telstra falls below $4.00 before expiry.

Common mistakes

  • ✗Intrinsic value can be negative when an option is OTM. It is always at least zero by construction. The max⁡(⋅,0)\max(\cdot, 0) wrapper enforces this because the holder simply chooses not to exercise when the inner expression is negative.
  • ✗Intrinsic value equals the option premium. Premium equals intrinsic value plus time value. Only at expiry, when time value vanishes, do the two coincide.
  • ✗An ATM option has positive intrinsic value because the strike equals the spot. An ATM option has zero intrinsic value. Both S−KS - K and K−SK - S equal zero when S=KS = K, leaving only time value in the premium.

Revision bullets

  • •Call: max⁡(S−K,0)\max(S - K, 0)
  • •Put: max⁡(K−S,0)\max(K - S, 0)
  • •Never negative by construction
  • •Only ITM options carry positive intrinsic value
  • •Sets the lower bound on American option premium

Quick check

A call with K=K = 100$ when S=S = 95$ has intrinsic value of:

At expiry, the price of an option equals:

Connected topics

PremiumMoneynessTime Value

In learning paths

Options Path

Sources

  1. Hull (2022), §11.3
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Defines intrinsic and time value and uses them to derive lower bounds on American option prices.
  2. McDonald (2013), §9.2
    McDonald, Robert L. Derivatives Markets. 3rd ed. Pearson, 2013. ISBN 978-0-321-54308-0.
    Worked examples decomposing premium into intrinsic and time value for both calls and puts.
  3. Cboe Options Institute Glossary
    Cboe Global Markets. Options Trading Glossary. Cboe Options Institute, accessed 2026.
    Industry definition of intrinsic value for US listed equity options.
  4. ASX Options Pricing Basics
    Australian Securities Exchange. Online Options Course, Pricing Section. ASX Investor Education, accessed 2026.
    Local teaching reference on intrinsic value for ASX equity option premium quotes.
How to cite this page
Dr. Phil's Quant Lab. (2026). Intrinsic Value. Derivatives Atlas. https://phucnguyenvan.com/concept/intrinsic-value
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