Definition
Intrinsic value represents what a company is actually worth based on its ability to generate cash flows, regardless of current market price. Value investors seek stocks trading below intrinsic value. Multiple methods exist to estimate it, including DCF, asset-based, and earnings-based approaches.
Formula
Example
If DCF analysis suggests a stock is worth $50 but it trades at $35, the intrinsic value is $50 and the stock may be 30% undervalued.
FAQ
What is Intrinsic Value?
The calculated true worth of a company based on fundamental analysis.
How do you calculate Intrinsic Value?
A common formula for Intrinsic Value is: Call Intrinsic = Max(0, Stock Price - Strike) | Put Intrinsic = Max(0, Strike - Stock Price)
Why is Intrinsic Value important?
Intrinsic Value helps investors evaluate options and make more informed decisions.
Related Terms
Time Value (Options)
The portion of an option premium above its intrinsic value.
Option Premium
The price paid to purchase an option contract.
In The Money (ITM)
An option with intrinsic value that would be profitable if exercised immediately.
Exercise (Options)
When an option holder uses their right to buy or sell the underlying asset.