In the finance world, the intrinsic value is the value of an asset which is calculated through analysis. The intrinsic value of the option could be viewed as a component of an option premium. In this case, the intrinsic value should be estimated as the difference between the underlying price and the strike price (Folger, 2018). In order to calculate the intrinsic value of a call option, one should deduct the underlying price from the strike price.
In order to calculate the intrinsic value of a put option, one should deduct the strike price from the underlying price. One may conclude that the option is in-the-monetary (which means that it has a positive monetary) if the underlying price is above a call option strike price. According to Mary Hall (2018), the intrinsic value of an option tells whether there is a financial advantage from the immediate exercising of that option. Therefore, the intrinsic option might be considered as a minimum value of an option.
There are multiple calculation methods which could be used for determining the intrinsic value of stocks. In particular, among these methods, there are discounted cash flow analysis, analysis based on a financial metric, and asset-based valuation. In the discounted cash flow analysis, the intrinsic value is calculated as the sum of the present value of all future cash flows (“What is intrinsic value?” n.d).
Some investors may conduct an analysis using a financial metrics such as the price-to-earnings ratio (“What is intrinsic value?” n.d.). This method of calculating the intrinsic value is considered to be the most generally used. Another method, which is the asset-based evaluation, calculates the intrinsic value as the sum of all the company’s tangible and intangible assets from which its liabilities are then subtracted.
References
Folger, J. (2018). Options pricing: Intrinsic value and time value. Web.
Hall, M. (2018). Understanding option pricing. Web.
What is intrinsic value? (n.d.). Web.