What determines the intrinsic value of an option?

The intrinsic value of an option is determined by the difference between the strike price of the option and the current market price of the underlying asset. For a call option, intrinsic value is calculated as the market price of the underlying asset minus the strike price, and for a put option, it is the strike price minus the market price of the underlying asset. This represents the actual value that could be realized if the option were exercised at that moment.

This measure captures the profitability of an option if it were to be exercised immediately. If the option is "in the money," it will have a positive intrinsic value; if it is "out of the money," the intrinsic value is zero since exercising it would not yield a profit. Consequently, understanding intrinsic value is crucial for traders seeking to evaluate their options' potential profitability in relation to current market conditions.

Other factors like the total premium paid for the option, the time until expiration, and the volatility of the underlying asset are important in overall option pricing and strategies, but they do not define intrinsic value directly. They contribute to the option's extrinsic value or total premium but are not the basis for calculating intrinsic value.