Intrinsic value definition

Intrinsic value is the underlying worth of an asset judged from its fundamentals rather than its current market price. It is used to assess shares, businesses, bonds, and options.

For a stock or a business, investors estimate intrinsic value from factors such as earnings, cash flow, assets, liabilities, growth potential, and risk. For an option, intrinsic value has a precise meaning: it is the amount by which the option is in the money, the difference between the strike price and the current price of the underlying, and it is zero when the option is out of the money.

Intrinsic value differs from market value, the price the asset actually trades at. When market value sits below estimated intrinsic value, the asset may be undervalued, and when it sits above, it may be overvalued. For an option, the gap between its market price and its intrinsic value is the time value, the extra a buyer pays for the chance that the option moves further into the money before it expires.