Intrinsic Value Calculation

Option with no intrinsic value, Can an Option's Intrinsic Value Be Negative? - Macroption

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Glossary Short answer: No. It is positive for in the money options. It is zero for out of the money options.

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Intrinsic Value Calculation Intrinsic value of an option is the value one would gain from exercising the option immediately.

It is different for calls and puts.

Intrinsic Value – Put Option

It is that you hold the option until expiration and it expires worthless, making you lose the entire initial investment the option premium paid. Will you exercise the option?

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Fortunately, options give you the right, but not the obligation to exercise. Generally, you will only choose to exercise when doing so would be profitable for you. Therefore you choose to not exercise the option and just let it expire.

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An option always gives you two alternatives: to exercise or not to exercise. For calls it is underlying price minus strike price underlying price minus 20 in our example.

For puts it is strike price minus underlying price.

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The outcome of not exercising is always zero. Do nothing — gain nothing — lose nothing. It makes sense to always choose the better of the two outcomes, which is never worse than zero.

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