Second video in our future and option series explains another basic term in option trading - Intrinsic value of an option contract. The intrinsic value of an option is, the money the option buyer makes from an options contract provided he has the right to exercise that option on the given day.
Option premium = Intrinsic value + Extrinsic value.
The intrinsic value of an options contract can never be negative. It can be either zero or a positive number.
Call option Intrinsic value = Spot Price – Strike Price
Put option Intrinsic value = Strike Price – Spot price
Time value = Time value refers to the portion of an option's premium that is attributable to the amount of time remaining until the expiration of the option contract.
Summary
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The intrinsic value of an option is the amount of money you would make if you were to exercise the option contract.
The intrinsic value of an options contract can never be negative. It can be either zero or a positive number.
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