Strike price and intrinsic value
On the examples with Microsoft stock, we have explored the strike price and intrinsic value of call options and put options. To sum up and make it look a bit more scientific, let’s look at the formulas for calculating intrinsic value for calls and puts.
Calculating intrinsic value of call options
Call intrinsic value = MAX of (stock price less strike price OR zero)
Calculating intrinsic value of put options
Put intrinsic value = MAX of (strike price less stock price OR zero)
Learn the logic, not the formulas
Nevertheless, the recommendation now is: do not memorize the formulas. Instead, focus on the logic and make this logic your natural way of thinking. For example, like this:
You have a call. – You are buying the stock. – You want to buy as low as possible. – Therefore, if strike is lower, option has greater intrinsic value.
Or consider a put. – You are selling. – You want to sell as high as possible. – …
Do not memorize. Understand.