Understanding How Options Are Priced

# Intrinsic value of a put option formula

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This page explains intrinsic value of put options and how it changes with underlying price. Intrinsic Value of Calls vs. This is for calls. With put options, which give their owner a right to sell the stock, the relationship is different, or, as you would probably expect, just inverse.

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It is OK to spend some time on this, as the concept of intrinsic value and call vs. But remember, this is a put option, which gives you a right to sell not buy the stock for the strike price. Would you like to sell the stock for 25, when in the stock market you can sell it for 20? Definitely you would, because you would make 5 dollars more. These 5 dollars are the value that the put option has hidden inside it, the intrinsic value. By exercising the put optionyou would only get Is there any intrinsic value in the option now? In this case, it is best to do nothing and throw the option away or using the correct terminology, let the option expire without exercising it. With stock at 17 and strike at 25, intrinsic value is 25 less 17, or 8 dollars.

Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation or complex financial model, rather than using the currently trading market price of that asset. In financial analysis this term is used in conjunction with the work of identifying, as nearly as possible, the underlying value of a company and its cash flow. In options pricing it refers to the difference between the strike price of the option and the current price of the underlying asset. Most often the term implies the work of a financial analyst who attempts to estimate an asset's intrinsic value through the use of fundamental and technical analysis.

Note that the relationship between the move in the stock price and intrinsic value is just opposite with calls and puts. Intrinsic value of put options declines when stock price rises, and vice versa. Intrinsic Value Formulas To sum up, quantify, and highlight the difference between call and put options, see the basic intrinsic value formulas.

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