Intrinsic Value in Option Trading
Intrinsic value is the value of an option that is determined by the underlying asset's current market price relative to the option's strike price. In options trading, an option's intrinsic value is the difference between the current price of the underlying asset and the option's strike price.
let's take an example if the current market price of a stock is ₹50 and a call option has a strike price of ₹45, the option has an intrinsic value of ₹5 (₹50 - ₹45 = ₹5). This is because the call option gives the holder the right to buy the stock at ₹45, which is lower than the current market price. Therefore, the option has an immediate value that the holder can potentially realize if they exercise the option.
If the current market price is lower than the strike price of the option, the option has no intrinsic value. Like, if the current market price of a stock is ₹40 and a call option has a strike price of ₹45, the option has no intrinsic value because it would not make sense to buy the stock at a higher price than the current market price.
Intrinsic value is an important concept in options trading because it helps investors determine the minimum value of an option. All other factors being equal, an option with a higher intrinsic value will generally have a higher price than an option with a lower intrinsic value.
