Understanding Option Intrinsic Value: A Clear Explanation

Intrinsic value for call options is literally the difference between the price of the market and the strike price (or exercise price), as long as the market is above the strike price. The intrinsic value for put options is literally the difference between the price of the market and the strike price, so long as the market is below the strike price. The strike (or exercise) price is the contract's stated agreed-upon value for buying the underlying security of a call option or selling the underlying security of a put option at the expiration date or upon exercise.

Time Value

The intrinsic value is the amount of profit upon exercise. Understanding this contract rule helps one to understand the time value of options.

When there is a positive intrinsic value in the option contract, as long as the option has time until expiration, the option will always state a price that offers a profit greater than the intrinsic value. This value above and beyond intrinsic value is the time value of the option. The time value ensures that the writer of the option doesn't receive a risk-free profit taking. At expiration, all time value equals zero, and the option is priced purely for intrinsic value.