Economics Options And Futures Questions Medium
In options trading, the concept of intrinsic value refers to the inherent worth or value of an option. It is the difference between the current market price of the underlying asset and the strike price of the option.
For call options, the intrinsic value is calculated by subtracting the strike price from the current market price of the underlying asset. If the market price is higher than the strike price, the call option has intrinsic value. This is because the option holder can exercise the option and buy the underlying asset at a lower price (strike price) and immediately sell it at the higher market price, making a profit.
For put options, the intrinsic value is calculated by subtracting the current market price of the underlying asset from the strike price. If the market price is lower than the strike price, the put option has intrinsic value. This is because the option holder can exercise the option and sell the underlying asset at a higher price (strike price) than the current market price, making a profit.
It is important to note that the intrinsic value of an option cannot be negative. If the market price of the underlying asset is lower than the strike price for a call option, or higher than the strike price for a put option, the option is said to be "out of the money" and has no intrinsic value. In such cases, the option's value is solely based on its time value, which is influenced by factors such as volatility, time to expiration, and interest rates.