Strike Price and Intrinsic Value of Put Options

Intrinsic value

In the article about strike price and intrinsic value of call options we learned that intrinsic value is the difference between the market price of the underlying stock and the option’s strike price. It moves together with the stock price, but can’t be negative. However, we only talked about calls.

Put options are different

With put options, which give their owner a right to sell the stock, the relationship is different, or, as you would probably expect, just inverse. Let’s review the Microsoft example from the call options article. It’s OK to spend some time on this, as the concept of intrinsic value and call vs. put difference is crucial for understanding options and discovering the vast possibilities they offer in terms of trading.

Strike 25, stock at 20 = put intrinsic value 5

Let’s now consider a put option with a strike price of 25$. In the beginning, Microsoft stock price is 20$, so it is lower than the strike. But remember, this is a put option, which gives you a right to sell (not buy) the stock for the strike price. Would you like to sell the stock for 25, when in the stock market you can sell it for 20? Definitely you would, because you would make 5 dollars more. These 5 dollars are the value that the put option has hidden inside it, the intrinsic value.

Strike 25, stock at 28 = put intrinsic value 0

If stock goes up to 28, you would now get 28 dollars for selling the stock on the stock market. By exercising the put option, you would only get 25. Is there any intrinsic value in the option now? It isn’t, because you would give up 3 dollars by exercising it. But remember, the intrinsic value can’t be negative, as you always have the choice. In this case, the best thing is to do nothing and throw the option away (or using the correct terminology, let the option expire without exercising it).

Strike 25, stock at 17 = put intrinsic value 8

The more the stock price declines, the more attractive it is to get rid of the stock by exercising the put option, relative to selling the stock on the stock market. With stock at 17 and strike at 25, intrinsic value is 25 less 17, or 8 dollars. Note that the relationship between the move in the stock price and intrinsic value is just opposite with calls and puts. The intrinsic value of put options declines when stock price rises, and vice versa.

Intrinsic value formulas

To sum up, quantify, and highlight the difference between call and put options and their intrinsic value, you can have a look at the basic intrinsic value formulas.

Related pages

fifo lifo avconormdist function in excelcalculating sample size in exceloptions trading bookdividing big numbers without a calculatorthe complete guide to option pricing formulashow to trade vixterm structure of implied volatilitycovered call payoff diagramdark notepadleveraged short etfhow to create excel formulaswhat is a straddle optionoptions straddle calculatorinverse vixstatistics excel formulasoption trading bookseuro stoxx 50 wikiannualized standard deviation excelarithmetic percentagesdeviation from the mean calculatormacd valueslong straddle option strategystandard error of skewnesscalculating option deltaexcel cash flow diagramblack scholes calculationfinding variance on excelmoments skewness and kurtosis in statisticsrelative average deviation calculatorvalue of a call option formulastraddle tradeskewness formula statisticsimplied volatility meaningbackground notepadvix downloadhow is the vix calculatedoption trading greekscboe s&p 500call spread payoffgeometric mean advantages and disadvantagesblack scholes equationsstraddles optionssample covariance calculatorcost of preferred equity formulablack scholes put option formulaatr formulahistorical volatility calculationhow to calculate no of days in excel 2007vix and moreexpiration calendarintrinsic value formula excelblack scholes delta calculatorwhat is straddle optionstandard deviation financial calculatoroverbought stockoptions trading bookhedge fund 13f filingsconvert standard deviation to variancemean variance standard deviation formulahow to calculate cumulative in excelblack scholes in excelkurtosis and skewness pptblack scholes formulaoption theta formulastock quotes yahoo symbolannualized return formulastraddle strangle butterflyimplied volatility calculator excelmicrosoft stock calculatorpayoff chartblack scholes option pricing model explaineddefine sharpe ratiocalculating sharpe ratiomean calculator exceldelta put option