Intrinsic Value is the portion of the option's price attributed to the contract already being in the money. It can be calculated by deducting strike price of the option from its prevailing underlying stock price in call options and by deducting the underlying price from the strike price in the case of a put option.
Options pricing consists of two components: extrinsic value, and intrinsic value. Intrinsic value is defined by how much the option is in the money against the underlying (stock) at its current price. See the example below for a walkthrough. The extrinsic value is the remaining value of the option, once intrinsic value is subtracted.
Intrinsic Value may be added to your Brutus Options Ranker Strategy but is less important than Extrinsic Value.
If you are building a net-short options trading strategy you may look to minimize or altogether avoid options and spreads with intrinsic value as it rarely affects the profitability of the trade and generally increases the capital requirements.
If the trader is trading a net-long options strategy, then Intrinsic Value is more important. The buyer may want to hold a trade with high intrinsic value to ensure the position behaves closer to the underlying stock (high delta). Generally, Delta or amount ITM is better suited for this unless the trader is specifically looking for optimize their strategy with this parameter.
Let's break down Intrinsic and Extrinsic Value with an example. Apple Inc. ($AAPL) at the time of writing is $139.91/share. Let's take a look at options on AAPL that are expiring in 243 days.Strike Price $4.91 (Intrinsic Value) = $139.91 (stock price) - 135 (strike price) Now, since the option's mid price is $12.50 we have everything we need to calculate the Extrinsic Value: Extrinsic Value = Option Price - Intrinsic Value $7.59 (Extrinsic Value)= $12.50 (option price) - $4.91