Intrinsic value (finance)

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In

, objective measure. A distinction, is re the The intrinsic approach to valuation may be somewhat simplified, in that it ignores elements other than the measure in question.

Options

For an

(K) of the option, to the extent that this is in favor of the option holder. Thus, the option is said to have intrinsic value if the option is

out-of-the-money

, its intrinsic value is zero. For an option, then, the intrinsic value is the same as the "immediate value" or the "current value" of the contract, which is the profit that could be gained by exercising the option immediately. Formulaically:

${\displaystyle IV_{\textrm {out-of-the-money}}=0}$

${\displaystyle IV_{\textrm {in-the-money}}=\left\vert S-K\right\vert =\left\vert K-S\right\vert }$

For example, if the

USD

1.00 and the price of the underlying is US$1.20, then the option has an intrinsic value of US$0.20. This is because that call option allows the owner to buy the underlying stock at a price of 1.00, which they could then sell at its current market value of 1.20. Since this gives them a profit of 0.20, that is the current ("intrinsic") value of the option.

The market

in-the-money

before it expires, due to a change in the value in the underlying stock. [2]

This describes what happened in one GameStop options trade that became famous: a trader spent $53,000 buying a large number of call options that were extremely cheap, since they were so far out-of-the-money that other traders thought it was very unlikely that they would ever hold intrinsic value. However, these options had an expiration date far in the future, and two years later the underlying GameStop shares spiked in value, putting the options in-the-money, which the trader was able to exercise for $48 million. ^[3]

Equity

In valuing

to be produced by the company in question. [4] Intrinsic value is therefore defined to be the present value of all expected future net cash flows to the company; i.e. it is calculated via discounted cash flow valuation. (See also owner earnings and earnout.) Importantly, the appropriate to the company in question.

An alternative approach is to view intrinsic value as linked to the business' current

understated

. The valuation, then, will also often include required in this replication.

Real estate

In valuing

.

See also

• Terminal value
• Net realizable value
• Option time value
• Option (finance)
• Expected value

References