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Intrinsic Value

Intrinsic Value, in options trading, refers to the difference between an option’s current market price and its strike, or exercise price. This difference is only calculated if the option is “in the money”, meaning it would be profitable to exercise the option at its current value. 

For example, let’s consider a call option (the right to buy) for a stock with a strike price of ₹20. If the market price of the stock is currently ₹25, the intrinsic value of the option would be ₹5 (₹25 – ₹20 = ₹5) because you could exercise the option to buy the stock for ₹20, then immediately sell it for ₹25, netting a profit of ₹5 per share.

On the other hand, if the market price of the stock is below the strike price, the option is considered “out of the money” and its intrinsic value would be ₹0, since it would not be profitable to exercise.

It’s key to note that intrinsic value does not consider the time value of money or the risk associated with the underlying asset. Furthermore, not all options have intrinsic value. Out-of-the-money options, for instance, only have time value. Ultimately, understanding intrinsic value is crucial for making informed investment decisions in options trading.

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