What is Intrinsic Value?

Intrinsic value is a term commonly used when discussing options and other derivatives.  The price of an option is made up of a combination of intrinsic and extrinsic value (commonly called 'time value').

Intrinsic Value - is the portion of the price based on value of the underlying investment.  Options will only have intrinsic value when they are 'in the money'.   For a call option this only happens once the market price has exceeded the strike price.   Intrinsic value can be thought of as the 'asset backed value'

Extrinsic or time value - is the portion of the options price based on  perceived value.  There are several factors which make up time value, which are known as 'The Greeks'

 If the market price of a share is $104,  and a call option with a strike price of $100 is trading at $6,  then this option has $4 of intrinsic value (actual gain from buying a $104 stock for $100), an $2 of time value.  

At expiry, options will only have intrinsic value, if an option expires 'out of the money' then it will expire worthless