How Strike Price Determines a Call or Put’s Intrinsic Value

Summary

The document explains how an option’s strike price relates to its intrinsic value, the portion of an option’s value associated with exercising it immediately. A call gives its holder the right to buy the underlying asset, so it has positive intrinsic value when the market price is above the strike: the holder can buy below the market price. A put gives the right to sell, so it has positive intrinsic value when the strike is above the market price: the holder can sell above the market price.

These relationships explain why changing the strike affects call and put values in opposite directions, all else being equal. The explanation distinguishes intrinsic value from time value but focuses on the intrinsic-value intuition. It does not provide a complete option-pricing model, quantify time value, or discuss how volatility, expiration, rates, dividends, and other inputs affect an option’s market price. The examples are conceptual rather than supported by calculations or market data.

Key ideas

• A call has positive intrinsic value when its strike is below the underlying market price.
• A put has positive intrinsic value when its strike is above the underlying market price.
• Calls grant the right to buy, while puts grant the right to sell.
• Intrinsic value is only one component of an option’s price; the document does not model time value.

Tags

# Can not understand options pricing


# Can not understand options pricing












As we are seeing here http://www.theoptionsguide.com/strike-price.aspx

- Relationship between Strike Price & Call Option Price

- Relationship between Strike Price & Put Option Price

I do not understand these two things. Can anyone help me to understand this.

Thanks,

## Answer by rupweb (score 2, accepted)

https://quant.stackexchange.com/a/17882

Option pricing is all about intrinsic value and time value. The intrinsic value is the difference between the strike price and the underlying market price.

- A call is a right to buy the underlying. Therefore intrinsic value of a call is positive when the strike price is below the underlying market price. You can buy for less than the market offer.

- A put is the right to sell the underlying. Therefore intrinsic value of a put option is positive when the strike price is above the underlying market price. You can sell for more than the market bid.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.