Options & Derivatives

Intrinsic Value

The value an option would have if exercised immediately, never below zero.

max(S - K, 0) for a call. Option price = intrinsic value + time value, and time value is strictly positive before expiry.

That is the whole argument for never exercising an American call on a non-dividend stock early: exercising captures only intrinsic value and discards the time value, so selling the option always yields more.

Time value is largest at the money and decays to zero at expiry, at an accelerating rate - see theta.

Related terms

Practise this

Put it into practice

Knowing the definition is not the same as spotting where it applies under time pressure. Work the question bank free.

Start practising free

Browse the full quant interview glossary