Intrinsic Value
Also called: intrinsic value, in-the-money amount, real value of an option.
Formula
Call: max(Underlying level - Strike, 0). Put: max(Strike - Underlying level, 0).
How it is read
Intrinsic value is the closest thing an option has to a floor. Once the option is in the money it moves one-for-one with the underlying. It is also the only part of the premium that is still there at expiry. Compare intrinsic value against the whole premium. That is the standard way to split a price in two. One part is arithmetic. The rest is an assumption about the future. Take a premium of 78 on an option with 40 points of intrinsic value. It is carrying 38 of time value.
What it does not tell you
Intrinsic value is a snapshot, not a property. An option that has it now can lose all of it. That happens the moment the underlying crosses back through the strike. Nothing about the number says how likely that crossing is. It is also not the same as profit. A holder is only ahead once the intrinsic value exceeds the premium that was paid. That is a different level, and usually a higher one.
See it in an experiment
Inspect intrinsic value and time value
Change one input in Market X-Ray and watch what happens.
Market X-Ray: Expiry — What remains when an option reaches expiry?
Related concepts
What an Option Premium Is Made Of: Intrinsic Value and Time Value
An option's premium is two different things added together. Intrinsic value is what the option would be worth if it expired right now. That is pure arithmetic on the strike and the current level, and never less than zero. Time value is everything else: the amount paid for the chance that the underlying moves further before expiry. Intrinsic value moves only when the underlying moves. Time value shrinks every day regardless, and is exactly zero at expiry.
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