Intrinsic Value

Intrinsic value is the part of an option's price that reflects real, immediate worth if you exercised it right now. For a call, it is how far the stock price is above the strike. For a put, it is how far the stock price is below the strike.

An option's total price, its premium, is made up of intrinsic value plus extrinsic value (also called time value). Intrinsic value can never be negative; if exercising would not be worth anything, that portion is simply zero.

A stock trades at $105. A $100 call has $5 of intrinsic value, since exercising it means buying at $100 something worth $105. If that call's full price is $7.50, then $5.00 is intrinsic value and $2.50 is extrinsic value.

For puts it runs the other way: a $110 put on that same $105 stock has $5 of intrinsic value, since exercising it means selling at $110 something worth $105. A $100 put on that stock has zero intrinsic value, because exercising it would mean selling at $100 something worth more, which nobody would do.

An option with intrinsic value greater than zero is in the money (ITM). An option with zero intrinsic value is out of the money (OTM); its entire price, if it has any, is extrinsic value. An option whose strike sits right at the stock price is roughly at the money (ATM), with intrinsic value at or near zero.

Out-of-the-money options are cheaper precisely because they have no intrinsic value backing their price, which is also why they can lose their entire value if the stock never reaches the strike.

As expiration approaches, extrinsic value shrinks toward zero, so an option's price converges on its intrinsic value. An option that finishes with intrinsic value above zero is usually exercised automatically; one that finishes with zero intrinsic value expires worthless.

This is why traders watch intrinsic value closely near expiration: it is the part of the price that survives when time runs out, and it drives the decision to exercise, sell, or let an option lapse.