What is an option's intrinsic value for a call option with strike K and current stock price S?

• A. Intrinsic value = max(K - S, 0)
• B. Intrinsic value = max(S - K, 0)
• C. Intrinsic value is always S - K.
• D. Intrinsic value is zero if S > K.

Answer: (B)

Intrinsic value for a call option is the immediate exercise value. If you exercise the option, you pay the strike price K to buy the stock, which is currently worth S, so your profit right now would be S − K. You only exercise if that profit is positive, so if S ≤ K you’d get zero profit by exercising. That means the intrinsic value is the positive part of S − K, written as max(S − K, 0). When S > K, intrinsic value is S − K; when S ≤ K, intrinsic value is 0.