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Intrinsic Value

Intrinsic value is the part of an option's premium that comes purely from being in the money, separate from time value, and it's never negative.

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What It Means

Intrinsic value is the part of an option's premium that comes from it already being in the money. For a call, it's the underlying's price minus the strike price; for a put, it's the strike price minus the underlying's price. If that number would be negative, intrinsic value is just ₹0 — it never goes below that.

How It Works

An option's premium is made up of intrinsic value plus time value. Time value reflects the chance the option moves further in the money before expiry, and it decays every day, hitting zero exactly at expiry. What's left on the last day is intrinsic value alone, which is why an option's price on expiry day converges to its payoff.

Example

A Nifty ₹25,000 call trading when Nifty is at ₹25,300 has ₹300 of intrinsic value per share (₹25,300 minus ₹25,000). If that same call's premium is ₹340, the remaining ₹40 is time value. On expiry day, with no time left, that ₹40 disappears and the premium converges to exactly ₹300.

Warning

Don't assume an option's full premium is intrinsic value. Weeks before expiry, most of the premium on a near-the-money option is time value, not intrinsic value, and that portion erodes daily whether or not the price moves.

  • Call Option — intrinsic value for a call comes from price above strike
  • Put Option — intrinsic value for a put comes from price below strike
  • Strike Price — the reference point intrinsic value is measured against
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