Generally, it is the effective monetary advantage which would be obtained when an option is immediately exercised. In call options, intrinsic value (IV) is the difference between the underlying stock’s price (S) and the strike price (K). In put options, it is the difference between the strike price (K) and the underlying stock’s price (S).

In general, if the respective difference value (S-K for calls, and K-S for puts) is negative, the intrinsic value is said to be zero, because no payoff can be expected from exercising the option. This value represents the “in-the-money” portion of the premium paid to get the right to exercise.

For example, if the strike price of a call option is $25 and the current price of the underlying stock is $30, the intrinsic value is then $5. The intrinsic value cannot be less than zero because options don’t constitute obligations on the buyers (who have the right, but are not obliged, to exercise).