Option
Factual definition
An option is a contractual right, without an obligation for the holder, to buy an underlying asset (a call) or sell it (a put) at a specified exercise price under specified timing and other terms. An employee stock option is a call example; a grant is the award of the right.
Calculate intrinsic value for a stock call
Hypothetical: an employee receives a stock option with a five-year contractual term and a US$10 exercise price per share, subject to vesting and permitted exercise rules. At a share value of US$14, intrinsic value is 14 − 10 = US$4 per share.
That is not net profit after any premium, taxes or fees.
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| Measure | Amount |
|---|---|
| Share value | 14 |
| Exercise price | 10 |
| Intrinsic value | 14 − 10 = 4 |
Distinguish payoff from profit at expiration
Hypothetical purchased call covering 100 shares: exercise price is US$10 per share, premium paid is US$2 per share and the contract is evaluated at expiration. Assume no taxes, fees or financing costs.
If the shares are worth US$14, intrinsic payoff is (14 − 10) × 100 = US$400, but profit after the US$200 premium is US$200. At US$11, payoff is US$100 and the buyer loses US$100 overall.
At or below US$10, payoff is zero and the US$200 premium is lost.
The expiration break-even share price is US$12 under those assumptions. Before expiration, the option’s traded value can also reflect time and uncertainty, as Investor.gov’s options bulletin explains.
The employee grant above need not have the same premium, transferability or exercise rules as this purchased contract.
Where Option fits
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