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What is Intrinsic Value?

Intrinsic Value is the value of a security which is “built into it.” Both options and stocks have it, but it is different for each. Options and stocks have intrinsic value.

For options, the intrinsic value is easy to compute, if the option is in-the-money. It is the difference between the strike price of the option and the market price of the underlying security. If an option is out-of-the-money it has no intrinsic value.

For stocks, there is no simple way to compute intrinsic value, and different analysts and investors have a different idea of how to define it. Methods that can be used include Discounted Cash Flow, P/E ratio, EV/EBITDA, and book value. The book value or breakup value of a business can be seen as the least possible intrinsic value of a stock, but most value investors will use other metrics.

Keywords: book value, value investing, in the money, Out of The Money (OTM), P/E ratio, EV/EBITDA, Discounted Cash Flow (DCF), breakup value, options,