An intrinsic value option is an option that is understood to carry an inherent or intrinsic value. That value may be based on factors such as the name brand or trademarks of the entity issuing the option, or have to do with the current relationship between the strike price and the market price of the underlying asset associated with the option. The general idea of intrinsic value means that the option is considered to be stable and likely to produce reliable returns based on past performance in various types of market conditions.
With an intrinsic value option, there are a number of characteristics that are used to determine if the option does in fact carry some amount of value that is considered inherent and not based solely on current market price. This includes allowing for aspects of the issuer of the option that are sometimes hard to account for based on market price alone. For example, if the issuer is a company that is considered a leader in the industry, has copyrights associated with products that are consistently in demand, and owns trademarks that are considered immediately recognizable to consumers, that option will have inherent or intrinsic value.
The relationship between the market price and the strike price of the asset will also play a role in classifying an investment opportunity as an intrinsic value option. This is particularly true if the investment in question is structured as a call option. In this scenario, if the current market price for the asset is higher than the current strike price, this means that the difference between the two prices will represent a verifiable intrinsic value. Should that strike price fall below the market price, then there is no inherent value and the asset cannot be considered an intrinsic value option.
Evaluating the aspects of an intrinsic value option can help the investor determine if that asset should be purchased, held, or sold as soon as possible. Taking into account how likely that value is to continue increasing, remain stable, or decrease as new market trends emerge will go a long way in helping the investor decide how that investment fits into his or her overall investment strategy. When that value is based on well-established public opinions, demand for products and well-known trademarks, the investor may choose to hold onto the asset, even if little to no real growth is taking place at the current time. At the same time, if the investor perceives that the well-known issuer is about to be outdistanced by the competition due to changes in technology or some other serious factor, the option may be sold immediately, allowing the investor to avoid incurring a loss when first the strike price and then the general valuation for the option decline.
