## What is 'Intrinsic Value'

Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis. Also called the true value, the intrinsic value may or may not be the same as the current market value. Additionally, intrinsic value is also used in options pricing to indicate the amount that an option is "in the money."

Next Up

## BREAKING DOWN 'Intrinsic Value'

Intrinsic value can be calculated by value investors using fundamental analysis to look at both qualitative (business model, governance, and target market factors) and quantitative (ratios and financial statement analysis) aspects of a business. This calculated value is then compared to the market value to determine whether the business or asset is over- or undervalued.

The discounted cash flow (DCF) model is one commonly used valuation method used to determine a company's intrinsic value. The discounted cash flow model uses a company's free cash flow and weighted average cost of capital (WACC), which accounts for the time value of money, and then discounts all its future cash flow back to the present day.

[Intrinsic value is a core concept of value investors seeking to uncover hidden investment opportunities. In order to calculate intrinsic value, you need to have a strong understanding of fundamental analysis. Investopedia's Fundamental Analysis Course will show you how to calculate the true value of a stock and capitalize on undervalued opportunities. You'll learn how to read financial statements, use ratios to quickly determine value, as well as learn other techniques used by professionals in over five hours of on-demand videos, exercises, and interactive content.]

## Intrinsic Value of Options

The intrinsic value of call options is the difference between the underlying stock's price and the strike price. Conversely, the intrinsic value of put options is the difference between the strike price and the underlying stock's price. In the case of both call and put options, if the calculated 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 option's strike price is \$15 and the underlying stock's market price is \$25 a share, then the intrinsic value of the call option is the stock price less the strike price, or \$25 - \$15, so \$10. Assume the option was purchased for \$12, so the extrinsic value is the purchase price of the strike less the intrinsic value, or \$12 - \$10, so \$2. 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 a share. Therefore, the intrinsic value of the put option is the strike price less stock price, or \$20 - \$16, so \$4; and the extrinsic value is the purchase price of the strike less the intrinsic value, or \$5 - \$4, so \$1.

Now, let's assume that an investor purchases a put option with a strike price of \$15 for 50 cents when the underlying stock was trading at \$16. The strike price less the stock price, or \$15 - \$16, is negative, 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, the purchase price less the intrinsic value, or 50 cents - \$0, which is 50 cents.

RELATED TERMS
1. ### Time Value

The portion of an option's premium that is attributable to the ...
2. ### Sell to Close

Sell to close is an options trading order that is used to exit ...
3. ### Extrinsic Value

The difference between an option's market price and its intrinsic ...
4. ### Out Of The Money (OTM)

An out of the money option has no intrinsic value, but only possesses ...
5. ### Strike Price

Strike price is the price at which the underlying asset of a ...
6. ### Hidden Values

Hidden values are assets that are undervalued on a company's ...
Related Articles

### Understanding Option Pricing

Before venturing into the world of trading options, investors should have a good understanding of the factors determining the value of an option.

### The Basics Of Option Price

Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options.

The price of an option, otherwise known as the premium, has two basic components: intrinsic value and time value.

### Is Texas Instruments a Good Value Play? (TXN)

Find out whether investors and analysts believe that Texas Instruments would make a good value play at its current valuation, and learn more about its outlook.

### Should Employees Be Compensated With Stock Options?

Learn the good, the bad and the ugly sides of this type of payout.

### A Newbie's Guide to Reading an Options Chain

Learning to understand the language of options chains will help you become a more effective options trader.
RELATED FAQS
1. ### When is a call option considered to be "in the money"?

Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
2. ### How do I change my strike price once the trade has been placed already?

Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
3. ### When Is a Put Option Considered to Be 'in the Money?'

Learn about put options, how these financial derivatives work and when put options are considered to be in the money related ... Read Answer >>
4. ### What is the difference between in the money and out of the money?

Learn how the difference between in the money and out of the money options is determined by the relationship between strike ... Read Answer >>
Hot Definitions

The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
2. ### Futures Contract

An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
3. ### Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
4. ### Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
5. ### Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
6. ### Diversification

Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...