Intrinsic Value

Intrinsic Value Calculator Options Explained

Intrinsic value calculator refers to an investor’s perception of the inherent value of an asset, such as a company, stock, option, or real estate. Options refer to the money portion of a contract. The intrinsic value calculator is a nifty tool to learn a stock’s true value. 

The Intrinsic value calculator shows you if the value of a company is higher or lower than the current market value. It shows you how to calculate the risk you’ll be exposed to if you buy. This number is extremely useful for value investors whose goal is to buy stocks and other investments at a discount to this amount. 

If you didn’t already know, value investors try to find stocks trading for less than their intrinsic value. The general idea is to buy a stock for less than its worth, simple as that. In other words, the goal is to buy cheap stocks, not cheap-looking ones

Now, things get tricky as there’s no one set-in-stone way of evaluating a stock’s intrinsic value.

One would say that intrinsic value is subjective; two investors can form two completely different and equally valid opinions of the intrinsic value of the same stock. 

In the examples below, you will see a few different methods of the intrinsic value calculator used depending on the asset being assessed.

How to Calculate the Intrinsic Value of a Stock

The blue line is the market price, and the red line is IV. You can see when a stock is overpriced or underpriced.

Intrinsic Value Calculator Methods

Different assets require different methods to calculate their intrinsic value. Take options, for example. Calculating intrinsic value is easy.

You take the difference between the stock’s current price and the option’s strike price, then multiply it by the number of shares your options entitle you to buy. Hence, your intrinsic value calculator.

Intrinsic Value (options) = (Stock Price – Strike Price) * Number of Options

Say American Airlines (AAL) is trading for $35 a share. You own four call options that entitle you to buy the shares for $30.

So, the intrinsic value of your options equals the difference between the stock price ($35) and the strike price ($30), which is $5. Next, multiply the difference ($5) by the number of options (4*100 shares = 400 shares).

In this case, the option’s intrinsic value is $2,000, an “in the money” option. You can calculate this using the intrinsic value calculator or formula above.

Conversely, options not “in the money” have a strike price greater than the current share price. These options have no intrinsic value and are trading only for time value.

Intrinsic Value Calculator ThinkorSwim

Intrinsic Value Example

This is an example of an options chain in ThinkorSwim. The platform is customizable to allow extrinsic value, strike price, open interest, volume, and the Greeks, delta, gamma, theta, and vega

The options chain also shows ITM, OTM, and ATM strike prices.

How Do You Calculate the Intrinsic Value of a Stock?

  • Here are three different methods through which intrinsic value is calculated:
  • Price-to-Earnings (P/E) Ratio – This is the least scientific method yet considered the cornerstone of stock valuation. For example, if the average S&P 500 component trades for 15 times earnings, a stock that trades for just 12 times earnings could be considered undervalued.
  • Discounted Cash Flow Analysis – In a nutshell, discounted cash flow analysis uses the time value of money to estimate a company’s future cash flows. And the sum of the present value of all future cash flows is the intrinsic value. Keep in mind several variables need to be accounted for in this type of analysis.
  • Asset-Based Valuation – This is another popular method of calculating intrinsic value. You add a company’s tangible and intangible assets and subtract its liabilities.

Unfortunately, calculating intrinsic value regarding stocks isn’t so straightforward. Some people feel that intrinsic value is the present value of the business’s future cash flows.

Others believe it is all the available facts that determine value. Therefore, an intrinsic value calculator may be necessary.

Moreover, multiple calculation methods depend on the person doing the calculation. 

Intrinsic Value Calculator Example

Intrinsic Value Calculator Example

We use a handy resource called Investopedia for definitions and how to calculate it. They define intrinsic value as the actual value of a company or asset based on an underlying perception of its true value, including all aspects of this business, in tangible and intangible factors.

Knowing how to calculate the intrinsic value of a stock can be helpful in many ways. First, you need to know what it is. In essence, intrinsic value is used for value traders.

Value investing is buying stocks that seem underpriced when looking at fundamental analysis. Fundamental analysis is different than technical analysis. Technical analysis is predicting price movement based on previous market data using price and volume.

Fundamental analysis examines economic, financial, and other factors. In other words, they look at things like who’s in charge of the company, whether they have a good board and company financials.

Primarily, though, intrinsic value is used in options trading. This allows you to see how much a stock is in the money.

Cheap Looking Stocks

There’s a difference between buying cheap stocks and buying stocks for less than they’re worth. This is the core concept of value investing: buy cheap stocks, not cheap-looking stocks.

Most of the time, when a stock is trading for below-average book value, sales, or multiple earnings, it’s for a reason. Your job is to find that reason and act accordingly on your findings.

The company could be having problems – think mismanagement or the industry may be upheaval. Not long ago, we had trade wars between the US and China with sanctions and tariffs imposed.

This hurts companies, especially those that rely on the smooth flow of goods with minimal cost. 

Options Trading

There are a couple of different ways IV is used and why you should know how to calculate the intrinsic value of a stock. Right now, we’ll focus on options. Options trading gives you the right but not the obligation to buy or sell a stock at a specific price. Options are typically used as “insurance” if a stock goes up or down, but people love to trade them.

Many different factors make up a stock options contract and affect price. IV can have price implications, time decay, and implied volatility. Read our post on the implied volatility formula and its meaning.

IV for call options is the difference between a stock’s price and the strike price. For put options, it’s reversed. So, it’s the strike price and the stock price.

If the difference in value for both calls and puts is negative, then you would calculate the intrinsic value of a stock as zero. In essence, there are two components we are talking about here that define the value: intrinsic and extrinsic. Extrinsic value is another word for time value. Both of these components make up the total value of an option price.

Intrinsic Value Calculator

If you like math, here’s an intrinsic value equation to solve.

Intrinsic Value Fundamentals

Knowing how to calculate the intrinsic value of a stock is an important part of value investing. Investing is holding a stock or security long term. So, fundamental analysis is probably more important than technical analysis.

Value investors look at the qualitative and quantitative aspects of a stock. The qualitative side is the business model, governance, and target market factors. The quantitative side is ratios and financial statements.

If you’re going to invest in a stock long term, you don’t want to pick one that can’t make earnings, has a less-than-stellar CEO, or has bad financial data. That’s a recipe for losing your money. Selling an option is a great learning strategy if it is done right.

Value investors look to see if a business is out of the market’s favor and worth more than given credit. If you found a stock worth way more than you could get it for, wouldn’t you want to buy in?

Knowing how to calculate the intrinsic value of a stock helps determine if a stock is undervalued. In short, if you’re a value investor, you like buying an expensive stock on sale. 

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Retail

Fortunately or unfortunately, depending on how you look at it, there’s no shortage of cheap-looking stocks on the market. One particular sector rife with them is the retail sector.

With the rise of e-commerce, the fall of big-box stores has come as no surprise. And with this fall comes the fall in retail stock prices, with many trading near single-digit numbers.

Take the iconic retail store Sears. After 125 years in business, they had to file for bankruptcy. Now let’s look at Macy’s; last summer, it was trading at $40 and is now at $25.

This may look like a bargain, but it is only truly a bargain if it has a future. How does a store like Macy’s, which depends on 40% gross margins and heavy advertising, survive in a world where sales are moving online? 

Gamestop

For those gamers, GameStop (NYSE: GME) is another example of a stock that looks like a bargain but probably isn’t. In 2017, shares traded for just six times the previous year’s earnings.

This past year alone, the price plummeted from $17 to $8. I’d say GameStop’s main business of selling physical video games has a short future once the major game console makers go solely digital. This is because PCs went digital long ago, and it’s only a matter of time before consoles follow suit.

In response to the changing market, GameStop is trying to adapt by selling electronics and collectibles. And rest assured, when you fast-forward ten years, the way the company makes money will completely differ from how it does now.

What does that mean to you? If you value the stock based on earnings from a line of business that isn’t likely to be around in ten years, you might as well buy that bottle of expensive shampoo.

The bottom line here is that the intrinsic value of any stock depends on the company’s future, not just its present. Don’t get trapped!

Final Thoughts: Intrinsic Value Calculator

All “value stocks” are not created equal. You’re probably making a mistake if you’re buying a stock only because of a low valuation.

Unless, of course, the price is so low that nearly any scenario leads to profits. Remember, most cheap stocks are cheap for a reason.  

So it’s your job to find out why so you can capitalize on the true value stocks. You’re only as good as the stocks you trade.

If you need more help, take our options trading course.

Frequently Asked Questions

The intrinsic value of an option is the profit you make if you exercise the option right away. To calculate, you subtract the stock's current price from the call option's strike price. Alternatively, you can subtract the strike price of a put option from the current stock price. The amount by which an option is in the money (ITM) is its intrinsic value.

The intrinsic value of stocks is typically the ITM (in the money) portion of an options contract before the expiration day. Or with stocks in general, it’s the price of the security.

Most accurate way to calculate intrinsic value:

  • Log into your broker
  • Enter stock symbol
  • Go to options chain
  • Find the column for extrinsic value
  • This dollar amount will show extrinsic value

Here's a good example of intrinsic value:

  1. MCD - stock symbol
  2. Expiration - Jan, 19, 2024 
  3. Strike price $292.50
  4. Intrinsic value - $4.01

Short answer: No. An option's inherent worth cannot be negative. Similarly, it must be positive for options in the money. For out-of-the-money options, it's zero. Due to the very nature of options (you have the choice to act/exercise them when they are profitable to you), they can't be below zero. 

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