Intrinsic value definition

What is intrinsic value?

Intrinsic value is a way of describing the perceived or true value of an asset. This is not always identical to the current market price because assets can be over- or undervalued. Intrinsic value is a common part of fundamental analysis, which investors use to assess stocks, as well being used in options pricing.

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Examples of intrinsic value

In share trading

In share trading, intrinsic value can refer to the 'true' value of a company as perceived by a trader or investor. Different traders will have different ideas of what constitutes intrinsic value for a stock, with some giving prominence to strong fundamentals and others looking at its potential for growth.

In share trading, intrinsic value measures the inherent value of a share, while extrinsic value measures how much of its worth is derived from external factors.

In options trading

In options trading, intrinsic value is the difference between the underlying asset's price and the option's strike price. The method used to calculate intrinsic value will vary depending on the type of option that has been bought – in call options, it is the price of the underlying asset minus the strike price, where as in put options, it is the strike price minus the price of the underlying asset.

Intrinsic value only refers to in the money options – a negative intrinsic value would mean that the option is either at the money or out of the money.

In options trading, there is also the ‘extrinsic value’ of the option to consider. Extrinsic value is calculated as the difference between an option's market price and its intrinsic value. So, if an option has a premium of £50 and an intrinsic value of £30, its extrinsic value would be £20.

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