What does the term "Intrinsic Value" refer to in stock options?

The term "Intrinsic Value" in the context of stock options specifically refers to the difference between the current price of the underlying stock and the exercise price of the option. For a call option, intrinsic value is calculated by subtracting the exercise price from the current market price of the underlying stock; this indicates how much profit an option holder would realize if they exercised the option immediately.

For example, if a call option has an exercise price of $50, and the underlying stock is currently trading at $70, the intrinsic value of that option is $20. This reflects the financial advantage of exercising the option at that moment.

In contrast, options that are out-of-the-money, where the underlying stock price is less than the exercise price, will have an intrinsic value of zero since exercising the option would not be beneficial. Therefore, the term "Intrinsic Value" is directly tied to this relationship between the current stock price and the option's exercise price, making it a fundamental concept in understanding stock options.