Option Panda User Manual

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6. What is an option’s intrinsic value and extrinsic value?

An option value is composed of intrinsice value and extrinsic value.

$Option Value = Intrinsic Value + Extrinsic Value$

The intrinsic value of both call and put options is the difference between the underlying stock's price and the strike price. In the case of both call and put options, if the calculated value is negative, the intrinsic value is zero. In other words, intrinsic value only measures the profit as determined by the difference between the option's strike price and market price.

Call

Put

Current_Price >= Strike_Price

Current_Price - Strike_Price

0

Current_Price < Strike_Price

0

Strike_Price - Current_Price

Extrinsic value(aka. Time value) measures the difference between the market price of an option, called the premium, and its intrinsic value. Extrinsic value is also the portion of the worth that has been assigned to an option by factors other than the underlying asset's price. The opposite of extrinsic value is intrinsic value, which is the inherent worth of an option. Extrinsic value rises with increase in volatility in the market.

Call

Put

Current_Price >= Strike_Price

Option_Price- Intrinsic_Value

Option_Price

Current_Price < Strike_Price

Option_Price

Option_Price - Intrinsic_Value

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