Intrinsic value definition

In investing, intrinsic value can have two different meanings. Firstly, in options it is the difference between the underlying asset’s price and the option’s strike price. Secondly, it can refer to the ‘true’ value of a company as perceived by an investor. 

In options

In options, the way to calculate intrinsic value varies between the types of option. In call options, it is the price of the underlying asset minus the strike price. In put options, it is the strike price minus the price of the underlying asset.

Intrinsic value only refers to in the money options, and cannot be negative as a negative intrinsic value would mean that the option is either at the money or out of the money.

In shares

Different traders have different ideas of what constitutes intrinsic value for a stock, with some giving prominence to strong fundamentals and others looking at potential for growth or market conditions.

This means that a stock’s market value can differ significantly from an investor’s idea of its intrinsic value. At this point, the investor may choose to buy or sell the stock as he or she believes there is a variance in its current price and its actual worth. In this case, intrinsic value is similar to fair value.

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