Wednesday, February 11, 2009

Intrinsic Value

is the difference of the stock price and the strike price. Intrinsic value is the option's "in the money".. ITM portion of the option. If the stock opton is in the money.. the investor can sell or exercise the option for profit.

Call Option Intrinsic Value = Underlying Stock Current Price  minus the  Call Strike Price.

Put Option Intrinsic Value = Put Strike Price  minus the Underlying Stock Current Price.

So follow me using the strike price graph above:

Call Option: If the Underlying Stock Price is $100 and the Call Strike Price is $95 then the intrinsic value is $5.00.

Put Option: If the Put Strike Price is $105 and the Underlying Stock Price is $100 then the intrinsic value is $5.00.

Also, you see in the graph as the stock moves above or below within the context of the call or put option... the intrinsic value rises.... $5... $10, etc. Remember.. this is when you sell or exercise your option that is ITM.

Any option that is "OTM"... or Out of the Money has no intrinsic value... it would expire worthless.

Wooo! that's a lot of words!

1 comment:

  1. Nice post. I am not familiar with most of these terms but you have helped me learn some of these. very easily explained.

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