For ITM calls , what is the correct theoretically intrinsic value ? the difference between the strike and the spot , or maybe that difference multiplied by his delta. e.g. spot = 100 98 call = 2.70 with delta = 0.80 a) Intrinsic value = 2.00 b) Intrinsic value = 2 x 0.80 = 1.60 The commonly accepted is a) . But sometimes I think that the todays intrinsic value for that call has to consider the probability of ending ITM, which is delta. So if the underlying goes +1 a) Intrinsic value = 3.00 b) Intrinsic value = 1.60 + 0.80 = 2.40 Please I would like to know what you think about this. Thank you.
Hey RAF... you need to be careful here, you have to look at the value of the same strike put... because it's very likely that while an ITM call looks to only have a little bit of extrinsic value, it might not be an early exercise. If you look at the break even point where it makes no difference, you will see that it's very likely that the extrinsic value is almost zero. It's always about what you give up/what you gain. This doesn't really matter, since cum-div Apple was at 188, ex-div Apple was at 187.27. So you gain on the short, but you have to deliver the dividend... so nett zero (ceterus paribus).
Intrinsic value is always Spot-Strike+Interest... Or Spot-discountedStrike. The delta doesn't really have anything to do with the intrinsic value.... it kinda shows the change in extrinsic value due to move in the underlying... Say... 80d call (=20d put)... stock goes up 1, so the intrinsic value of the call goes up by 1.. but the extrinsic value goes down by 0.20.... so total call value up by 0.80. This is because the put value (which is entirely extrinsic) goes down by 0.20.... So again, for a quick calculation for the extrinsic value of any option (except in dividend situation and some others)... look at the same strike OTM value.