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Intrinsic Value Calculation for Option Contracts
The amount that an option is "In The Money" is the Intrinsic Value of the contract. The calculation is based on the strike price and the market price of the stock. If a call option is in the money by 3 points, the contract has 3 points of intrinsic value. This formula method is used for Puts and Calls.
Stock Option investments are profitable based on the market price of a stock and the strike price. These profit direction calculations are different if a Put or a Call contract is held and the intrinsic value is looked at differently. An option being in the money does not mean the investor is profitable. If an investor bought call options for $500 with a strike price of 60, while the market on the stock is 63 - the contract would have 3 points of intrinsic value (strike price of 60 and the market at 63). The formula
does not factor in the premium paid or the real break even for the trader, which is really 65 (strike price plus premium).
Thus, options that are in the money are not always at break even or better for the investor. Contracts that are in the money do trade higher than out of the money contracts - put or call.
Put Option
A put contract with a 40 strike price and a premium of $300 was purchased. The current market is 41. In this situation, the break even method and formula is strike price minus premium - which is 37. An investor always wants the stock to go down on a Long Put. The option also has 0 intrinsic value because the option is out of the money. It is out of the money by one point since all put options are only in the money when the stock price is below the market price. You calculate the intrinsic value based on whether an option is in or out of the money only. The formula does not factor in cost or whether a trader is long or short.
All Calls are “In the money” when the market price is above the strike price
All Puts are “In the money” when the market price is below the strike price
All options are “At the money” when the market price is equal to the strike price
Options cannot have negative intrinsic value in the formula. If the option is out of the money, then the option has no intrinsic value.
Ex: 1 HLP DEC 25 PUT
HLP Current Market Value is 26
Stock is 1 point above the Put
Intrinsic value Calculation = 0
If a contract is out of the money, the point value is never negative. If a call or a put is not in the money, the intrinsic is always 0. The method for calculating this is very simple.
The definition recap is that Intrinsic value of contracts is equal to the in the money amount of a stock option, not counting the cost or position side. This method should be used when considering trading in these investments.
Copyright  2006-2007 American Investment Training, Inc.
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