Why a Call Option Can Trade Below Its Intrinsic Value

Summary

The document addresses whether an option must be worth more than its intrinsic value and whether a high-priced option will be difficult to sell. Its answer focuses on the first question: a call can trade below intrinsic value when dividends and other pricing inputs affect the value of exercising later rather than immediately. The example gives a stock price of $150, a $100 strike, one year to expiry, a zero risk-free rate, a 5% dividend yield, and 40% implied volatility. Under those assumptions, intrinsic value is $50 while the call price is $47.52.

The example shows that intrinsic value is not a guaranteed lower bound on an American-style exercise decision in the pricing setup described; the question does not specify exercise style, and the answer does not explain the model used to obtain the quoted price. It also leaves the liquidity question unanswered: a large notional price alone does not establish how readily a contract can be sold.

Key ideas

• A call option’s market price can be below its intrinsic value under some pricing assumptions.
• The example attributes the result to a combination of dividends, maturity, rates, and implied volatility.
• The document does not provide guidance on whether an expensive option will have buyers or be liquid.

Tags

# Answer by Chris Taylor (score 2)


# Will an options contract always be worth more than it's intrinsic value ? Also if it's very expensive, will it be hard to sell?












So I'm wanting to know if my call option will be worth more than its intrinsic value and also if lets say it ends up being worth 20k will people be buying it on the market ?

## Answer by Chris Taylor (score 2)

https://quant.stackexchange.com/a/63134

No. For example, consider a call option struck on a stock with current price \$150, strike price \$100, 1 year to maturity, 0% risk free rate, 5% dividend yield and 40% implied volatility.

The intrinsic value is \$50 but the price of the call is \$47.52.

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