Intrinsic Value

Intrinsic value is the amount an option would be worth if it were exercised immediately — the real, tangible value already built into the contract, separate from any speculation about the future. A call option's intrinsic value is the stock price minus the strike price (if positive); a put option's is the strike price minus the stock price (if positive). An option that's out-of-the-money has zero intrinsic value, since exercising it wouldn't produce any benefit. Every option's premium is made up of intrinsic value plus time value; an option deep in-the-money, close to expiration, is priced almost entirely on intrinsic value, while an option far out-of-the-money is priced entirely on time value, since it has no intrinsic value to speak of. It's the relationship between the stock price and the strike price that determines whether an option is classified as in-the-money, at-the-money, or out-of-the-money — intrinsic value only turns positive once an option is in-the-money; both at-the-money and out-of-the-money options have zero intrinsic value.