## What is the 'Intrinsic Value'

The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Additionally, intrinsic value is primarily used in options pricing to indicate the amount an option is in the money.

Next Up

## BREAKING DOWN 'Intrinsic Value'

Value investors who follow fundamental analysis typically look at both qualitative (business model, governance and target market factors) and quantitative (ratios and financial statement analysis) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation. The discounted cash flow model is one commonly used valuation method used to determine a company's intrinsic value. The discounted cash flow model takes into account a company's free cash flow and weighted average cost of capital, which accounts for the time value of money.

## Intrinsic Value of Options

The intrinsic value for call options is the difference between the underlying stock's price and the strike price. Conversely, the intrinsic value for put options is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero. Intrinsic value and extrinsic value combine to make up the total value of an option's price. The extrinsic value, or time value, takes into account the external factors that affect an option's price, such as implied volatility and time value.

## Intrinsic Value of Options Examples

Intrinsic value in options is the in-the-money portion of the option's premium. For example, if a call options strike price is \$15 and the underlying stock's market price is at \$25, then the intrinsic value of the call option is \$10, or \$25 - \$15. Assume the option was purchased for \$12, so the extrinsic value is \$2, or \$12 - \$10. An option is usually never worth less than what an option holder can receive if the option is exercised.

On the other hand, assume an investor purchases a put option with a strike price of \$20 for \$5, when the underlying stock was trading at \$16. Therefore, the intrinsic value of the put option is \$4, or \$20 - \$16, and the extrinsic value is \$1, or \$5 - \$4. Assume that instead of purchasing a put option with a strike price of \$20, the investor purchases a put option with a strike price of \$15 for 50 cents, when the underlying stock was trading at \$16. Therefore, the intrinsic value would be \$0 because the option is out of the money. However, the option still has value, which only comes from the extrinsic value, which is worth 50 cents.

RELATED TERMS
1. ### Extrinsic Value

The difference between an option's market price and its intrinsic ...
2. ### Time Value

The portion of an option's premium that is attributable to the ...
3. ### Large-Value Stock

A type of large-cap stock investment where the intrinsic value ...

1. The income received by an investor who sells or "writes" an ...
5. ### Valuation

The process of determining the current worth of an asset or company. ...
6. ### In The Money

1. For a call option, when the option's strike price is below ...
Related Articles

### The Basics Of Option Price

Options can be an excellent addition to a portfolio. Find out how to get started.

### What Is Option Moneyness?

Get the basics under your cap before you get into the game.
3. Investing

### What Is The Intrinsic Value Of A Stock?

Intrinsic value can be subjective and difficult to estimate. Itâ€™s a perception of a securityâ€™s value that factors tangible and intangible factors.

### What Drives An Option's Price?

The primary drivers of an optionâ€™s price are the underlying stockâ€™s current price, the optionâ€™s intrinsic value, its time to expiration and volatility.
5. Investing

### What Is The Intrinsic Value Of A Stock?

Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.

### Getting A Handle On The Options Premium

The price of an option, otherwise known as the premium, has two basic components: the intrinsic value and the time value. Understanding these factors better can help the trader discern which ...

### What Does It Mean When an Option is At The Money?

The strike price of an at-the-money options contract is equal to its current market price. Options that are at the money have no intrinsic value, but may have time value.

### The Ins And Outs Of Selling Options

Selling options can seem intimidating but with these tips, you can enter the market with confidence.
RELATED FAQS
1. ### What role does intrinsic value play in call options?

Understand why the concept of intrinsic value is important for options traders and how they can use it to estimate what a ... Read Answer >>
2. ### Do you always have to consider intrinsic value when purchasing a stock? Why or why ...

Take a deeper look at why value investors consider a stock's intrinsic value an important consideration before picking a ... Read Answer >>
3. ### What is the difference between intrinsic value and current market value?

Discover the differences between intrinsic and market values, what makes the former difficult to determine and how investor ... Read Answer >>

5. ### What is the difference between a company's book value per share and its intrinsic ...

Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >>
Hot Definitions
1. ### Pro-Rata

Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
2. ### Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital.
3. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
4. ### Backward Integration

A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
5. ### Pari-passu

A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
6. ### Interest Rate Swap

An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...