INTRINSIC VALUE
The premium or the price of an option is made up of two components, namely, intrinsic value and time value. Intrinsic value is termed as parity value.
For an option, the intrinsic value refers to the amount by which it is in money if it is in-the-money. Therefore, an option, which is out-of-the-money or at-the-money, has zero intrinsic value.
For a call option, which is in-the-money, then, the intrinsic value is the excess of stock price (S) over the exercise price (E), while it is zero if the option is other than in-the-money. Symbolically,
Intrinsic Value of a call option = max (0, S – E)
In case, of an in-the-money put option, however, the intrinsic value is the amount by which the exercise price exceeds the stock price, and zero otherwise. Thus,
Intrinsic Value of a put option = max (0, E – S)
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