Question about intrinsic value?

What is intrinsic value? How is intrinsic value used to make investment decisions? What are the key factors impacting intrinsic value?

The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.

For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the instrinsic value is given as zero.

An option is said to have intrinsic value if the option is in-the-money. When out-of-the-money, its intrinsic value is zero.

The intrinsic value for an in-the-money option is calculated as the absolute value of the difference between the current price (S) of the underlying and the strike price (K) of the option, floored to zero.

IV = max{0, | S 鈭?K | }
More specifically, for a call option

IVcall = max{0,S 鈭?K}
while for a put option

IVput = max{0,K 鈭?S}

For example, if the strike price for a call option is USD 1 and the price of the underlying is USD 1.20, then the option has an intrinsic value of USD 0.20.

I'll give you an example of intrinsic value. You have a $20 Gold Coin that has a numismatic (coin collector) value of $1500. However the coin weighs one ounce, so its intrinsic value is that of one Oz. of Gold. About $750. Investing in Gold Krugerrands is investing in only the intrinsic value of Gold. Investing in a scarce $20 Gold coin appreciates when the price of Gold rises and when the collective value of the coin rises.