Editing Option time value (section)

==Intrinsic value==<!-- This section is linked from [[Option style]] -->

The '''intrinsic value''' ('''IV''') of an option is the value of exercising it now. If the price of the underlying stock is above a call option strike price, the option has a positive intrinsic value, and is referred to as being [[in-the-money]]. If the underlying stock is priced cheaper than the call option's strike price, its intrinsic value is zero and the call option is referred to as being [[out-of-the-money]]. An out-of-the-money option can nevertheless have an overall positive monetary value prior to expiry due to its time value. If an option is out-of-the-money at expiration, its holder simply abandons the option and it expires worthless. Hence, ''a purchased option can never have a negative value''.<ref>[http://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp  ''Understanding Option Pricing ''] Hans Wagner</ref> This is because a rational investor would choose to buy the underlying stock at the market price rather than exercise an out-of-the-money call option to buy the same stock at a higher-than-market price.

For the same reasons, a put option is [[in-the-money]] if it allows the purchase of the underlying at a market price below the strike price of the put option. A put option is [[out-of-the-money]] if the underlying's spot price is higher than the strike price.

As shown in the below equations and graph, the intrinsic value (IV) of a call option is positive when the underlying asset's [[spot price]] ''S'' exceeds the option's [[strike price]] ''K''.

:Value of a [[call option]]: <math>\max[ (S-K) , 0 ]</math>, or <math>(S-K)^{+}</math>
:Value of a [[put option]]: <math>\max[ (K-S) , 0 ]</math>, or <math>(K-S)^{+}</math>