Intrinsic Value | Series 3 Study Guide

Quick Answer

Intrinsic value is the amount by which an option on futures is in-the-money: what it would be worth if exercised right now. A call's intrinsic value equals the underlying futures price minus the strike; a put's equals the strike minus the futures. It can never be negative.

These are options on futures contracts, so "the underlying" means the underlying futures price, not a stock. A call is the right to go long futures at the strike price; a put is the right to go short futures at the strike. Start with intrinsic value because it is the anchor the whole premium is built on.

What Intrinsic Value Is

Intrinsic value is the part of the premium backed by real in-the-money worth. It is the amount by which an option is in-the-money (ITM): the payoff if it were exercised at this instant.

Premium: the price the buyer pays the seller (the grantor or writer) for the option.
Intrinsic value: the in-the-money amount, and never less than zero.
Moneyness: whether an option currently has intrinsic value, described as in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

The core identity you will lean on all unit is simple:

\text{Premium} = \text{Intrinsic Value} + \text{Time Value}

Call Intrinsic Value

A call profits when the underlying rises, so it holds intrinsic value only when futures sit above the strike.

A call has intrinsic value only when the underlying futures price is above the strike.
Call intrinsic value $= \max(0,\ F - K)$ , where $F$ is the underlying futures price and $K$ is the strike price.
Example: futures at 105, call strike 100, intrinsic value is 5. With futures at 95, the call is out-of-the-money and intrinsic value is 0, not negative 5.

Put Intrinsic Value

A put profits when the underlying falls, so it mirrors the call: intrinsic value appears only when futures sit below the strike.

A put has intrinsic value only when the underlying futures price is below the strike.
Put intrinsic value $= \max(0,\ K - F)$ , the strike minus the underlying futures price.
Example: futures at 95, put strike 100, intrinsic value is 5. With futures at 105, the put is out-of-the-money and intrinsic value is 0, not negative 5.

Memory Aid: Call wants futures to Climb above the strike (futures minus strike); a put wants them to plunge below it (strike minus futures). If futures climb, the call is the one gaining intrinsic value.

Exam Tip: Gotchas

The call and put formulas are mirror images, and this is the single most-flipped fact in the unit. A call is in-the-money when futures are above the strike (futures minus strike); a put is in-the-money when futures are below the strike (strike minus futures). Catch yourself using "futures minus strike" for a put and you have them backwards.

Moneyness and Intrinsic Value by Case

Lining up both option types against where the underlying sits makes the pattern easy to check under exam pressure.

Situation	Call	Put
Futures above strike	In-the-money: IV = futures minus strike	Out-of-the-money: IV = 0
Futures equal to strike (at-the-money)	IV = 0	IV = 0
Futures below strike	Out-of-the-money: IV = 0	In-the-money: IV = strike minus futures

Only in-the-money options carry intrinsic value.
At-the-money and out-of-the-money options have zero intrinsic value, so their entire premium is time value.

Exam Tip: Gotchas

Intrinsic value can never be negative. An out-of-the-money option's intrinsic value is 0, not a negative number. If a formula produces a negative figure, the correct intrinsic value is zero and the option is simply out-of-the-money.