Intrinsic value (options)

Definition

Intrinsic value is the exercise value of an option at the current underlying price. A call struck at 500 when the underlying trades at 505 has an intrinsic value of 5; the 500 put has none. At expiry an option is worth exactly its intrinsic value, since no time remains for anything else. Before expiry the premium is intrinsic value plus extrinsic value, and the second part is never negative for American options, which can always be exercised.

Worked example

SPY trades at 505. A 30-day call struck at 500 with implied volatility 18% is worth about 13.04 in Black-Scholes with zero rates. Its intrinsic value is 505 − 500 = 5.00, so 8.04 is extrinsic. A 450 call on the same expiry is worth about 55.11, of which 55.00 is intrinsic: deep in the money, almost all the premium is exercise value. With the contract multiplier of 100, the 500 call costs about 1,304 dollars, of which 500 dollars is intrinsic.

The discounted version for European options

For European options, which cannot be exercised early, the no-arbitrage lower bound is not max(S − K, 0) but max(S·e^(−qτ) − K·e^(−rτ), 0) for a call and max(K·e^(−rτ) − S·e^(−qτ), 0) for a put. A deep in-the-money European put can therefore trade slightly below its simple intrinsic value when rates are positive. Implied volatility solvers check prices against these bounds, because a price below them has no solution.

• Intrinsic value uses the current spot, not the forward.
• For index options settled on a special opening quotation, the value that counts at expiry is the settlement value, not the previous close.
• Max pain calculations sum intrinsic value at expiry across the whole open interest.

Reading it on a flow tape

A large premium on an in-the-money print is mostly intrinsic value and behaves much like a position in the underlying: its delta is close to one. A similar premium on an out-of-the-money contract is entirely extrinsic and represents a bet on movement or volatility before expiry. Senzoukria's Option Flow table shows moneyness for each print, in the money, at the money within ±0.5% of spot, or out of the money, with the signed distance to spot in percent, so the two situations are not confused. On the Databento path of the GEX module, a quote below intrinsic value beyond a small tolerance is rejected when implied volatility is solved.