The “intrinsic value” is what we call the amount of an option that is in the money. For instance, let’s say an investor holds a bitcoin call option with a strike price of $10,000. If bitcoin is trading at $10,500 it means that the contract is in the money (ITM). The call option allows the investor to buy a bitcoin for $10,000 and immediately sell it for $10,500, making $500 profit. As a general rule:
- An in the money call option means the bitcoin option holder has the opportunity to buy bitcoin below its current market price.
- An in the money put option means the bitcoin option holder can sell the bitcoin above its current market price.
Note that if the same investor had paid a premium of $550 for the call option, although the option would still be in the money the investor would be losing $50 if the option was exercised given the premium paid. Hence, when an option is in the money it does not necessarily mean that a trader is making profit.