Stock Options Intrinsic Value






Formular for calculating Intrinsic value= stock price - strike price

Lets say Stock Price = $ 56.00

Call Premium is = $ 7.10

Strike Price = $ 50.00

Time to Expiration = 2 months

So this intrinsic options value = $ 56- $ 50= $ 6 .So if yo are selling the Call, this will be automatically exercised .The remaining bit $ 7.10- $ 6 = $ 1.10 is the Time value

(Note how Call Intrinsic Options Value + Time Value= Options Premium)

This example shows the Option's value is in the money ITM

Where there is No intrinsic Call options Value

Let's say the same stock with

stock price = $ 48

Call premium is = $ 0.75

Strike Price = $ 50.00

Time to expiration = 2 months

Intrinsic options Value = $ 48-$ 50= $ -2, but you can't have -ve, so the intrinsic call options value is zero.

Time value = $ 0.75- $0.00 =$ 0.75

This example shows options value is OUT of Money BUT ONLY HAS TIME VALUE.



Time Value is hope value, and a wasting asset. Therefore, when you buy an option, Time decay works against you. When you sell an option, Time Decay works in your favor.

The stock has to appreciate faster than time value decays. For this reason the less time value you buy and more intrinsic options value you buy the less risky your option would be.





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