The financial metric representing the profit realizable today if a stock option were immediately exercised is found by subtracting the option’s strike price from the current market price of the underlying stock. If the result is positive, the option possesses intrinsic value. For example, if a stock is trading at $50 and the option’s strike price is $40, the intrinsic value is $10 ($50 – $40 = $10). Conversely, if the stock price is lower than the strike price, the option is considered ‘out of the money’ and has zero intrinsic value.
Determining this quantifiable benefit is essential for option holders. It allows for immediate assessment of an option’s worth based on prevailing market conditions, offering a concrete measure against which to make informed decisions regarding exercising, holding, or selling the option. Historically, such valuation was often a manual and time-consuming process. However, modern financial tools and market data platforms now provide readily available calculations, enabling faster and more accurate assessments.