The part of the premium tied to how far in the money the option is. It exists only for ITM options.
What this value is
Intrinsic value (Intrinsic Value) is the solid part of a contract's price: what you would collect if the right were exercised now. For a call: the stock price minus the strike, if positive. For a put, the reverse. Below zero, intrinsic value is zero, never negative.
Why it is the price floor
A contract can trade below its intrinsic value only for moments, which arbitrage eats immediately: anyone who buys it below that exercises and collects the difference with no risk. So price = intrinsic value (a solid floor) + time value (a floor that breathes with time and volatility).
How it is used in practice
The share of intrinsic value in the price is a gauge of the contract's character: mostly intrinsic means stock-like behavior (high delta, relatively mild theta), and zero intrinsic means a pure bet on time and volatility. At expiration only intrinsic value is left and everything else evaporates.
Hypothetical example
A stock at $112 and a call with a $100 strike priced at $13.10: intrinsic value is $12 and time value is $1.10. The stock drops to $99: intrinsic value is zero and the whole price (about $1.60) is now pure time value. The contract has changed character.
Common mistake
Assuming a contract in the money "can't lose". The time portion decays however large the intrinsic part is, and a falling stock melts the intrinsic value itself. The floor moves with the stock. It is not a floor at the price you paid.
Its share of the price reveals the contract's character
Mostly intrinsic value means stock-like behavior (high delta, relatively mild theta). Zero intrinsic value means a pure bet on time and volatility. At expiration only intrinsic value is left and everything else evaporates. Measuring the ratio before you buy tells you what you are paying for as solid value and what will melt away.
Where to see it on the platform
The options calculator splits the price into intrinsic and time value for every contract it prices, so you see what you pay for as solid value and what will melt away.
The calculator splits the price into intrinsic and time value for every contract you price.
