intrinsic value

In finance, intrinsic value is a measure of the true worth, in dollar terms, of an asset or company based on an accurate assessment of fundamental values. For a company, intrinsic value, as estimated by professional stock analysts, would be the sum of all tangible and intangible assets if converted to cash. Some value investors seek companies whose market capitalization is lower than their intrinsic value.

In option markets, intrinsic value has an entirely different meaning. An option’s price is made up of two components: intrinsic value—the amount by which an option is in the money—and extrinsic value (or “time value”), which is based on the amount of expected variability in the underlying security between now and the option’s expiration.

For example, if stock XYZ is trading for $60 per share, and a call option at the 55-strike is trading for $6.25, that option would have $5 of intrinsic value (because the stock is trading exactly $5 above the strike price) and $1.25 of extrinsic value.

When an option expires, it has zero extrinsic value.