Intrinsic value definition

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Traders define intrinsic value in two ways:

  • In options* trading, it is the difference between the underlying asset's price and the option's strike price
  • In shares trading, it can refer to the 'true' value of a company as percieved 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.

What's the difference between intrinsic and extrinsic value?

In options trading, extrinsic value is calculated as the difference between an option's market price — meaning the premium you'd pay for the option — 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.

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

Visit our shares section

See the fundamentals for various shares and start calculating intrinsic value here.

*Options are only available via spread betting accounts and professional CFD accounts.

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