Been trading for a while now but still confused about intrinsic value. I know it affects option pricing but not sure what factors actually determine it.
Is it just the difference between strike price and current market price? Or are there other things that play into it?
Trying to understand this better so I can make smarter trades.
Intrinsic value for call options is current asset price minus strike price. For put options, it is strike price minus current asset price. Negative values are not possible. Time value is separate.
Understanding intrinsic value makes a difference in trading options. For calls, intrinsic value is current price minus strike price. For puts, it’s the reverse. If the calculation goes negative, it stays at zero since options can’t have negative intrinsic value. Additionally, remember that market trends and expiration play significant roles too.
Lost $400 on my second week because I ignored intrinsic value completely. Bought way out of the money calls thinking they were cheap.
Basically it’s just current price minus strike for calls, opposite for puts. But here’s what nobody tells you - options with zero intrinsic value can still move fast.
That expensive lesson taught me to always check if I’m paying mostly for time or actual value.
The calculations everyone mentioned are correct, but what really matters is recognizing when you’re paying fair value versus getting ripped off. Most options you’ll see have very little intrinsic value - they’re mostly time premium.
Focus on options that are already in the money if you want intrinsic value to work for you. Out of the money options have zero intrinsic value, so you’re betting purely on price movement before expiration.
This video breaks down intrinsic versus extrinsic value really well:
Once you understand this difference, you’ll stop overpaying for options that are mostly hype and time premium.
Intrinsic value is all about the difference. Calls use current price minus strike, puts the opposite.