Thanks for tuning in to our latest short [What is the Intrinsic Value of a Stock Option?] video 🎥! Today, we’re diving into the often misunderstood concept of the intrinsic value of a stock option. Don’t worry, we’ll break it down into easy-to-grasp concepts for you.
First off, let’s review what a stock option is – a contract that gives you the right to buy or sell a certain stock at a set price within a specific time frame. But the question is, how is the intrinsic value of an option determined?
Put simply, intrinsic value is the difference between the current stock price and the option’s strike price. This represents the potential profit that the option could yield if exercised at the current moment.
Let’s use an example to better understand. Imagine you have a call option for a stock with a strike price of $50, and the current stock price is $60. In this scenario, the option’s intrinsic value would be $10, as you would make a profit of $10 per share if you exercised it.
Conversely, if the stock price is below the strike price, the option would have no intrinsic value and would be considered “out of the money”.
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