11.24What is intrinsic value?
1What is it?
The value an option would have if exercised right now.
2Why does it exist?
It is the "real" part of the premium. At expiry, premium = intrinsic value.
3Calculation
Call: max(0, Spot − Strike); Put: max(0, Strike − Spot)
- Spot 25,200; 25,000 call → 200.
- Spot 25,200; 25,000 put → 0.
Call intrinsic 200; put intrinsic 0.
4Quick revision
- Value if exercised now.
- Never negative.
- Equals premium at expiry.
5Knowledge check
Q1. Spot 24,700; 25,000 put intrinsic?Show answer
300.
Q2. Spot 24,700; 25,000 call intrinsic?Show answer
0.
Q3. Can intrinsic value be negative?Show answer
No.