Intrinsic value

Intrinsic value

Options that are in the money, i.e. a call option whose strike price is lower than the price of the underlying and a put option whose strike price is higher than the price of the underlying, are said to have intrinsic value. Option value is made up of its intrinsic value – the difference between the strike price and the price of the underlying – and time value. At options expiry, time decay will have reduced time value to zero, in which case option value and intrinsic value are the same. For options with time left to expiry and therefore with time value, the option value will always be above the intrinsic value.

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