If we put our two conditions together, we have:

C0 > 0 if S0 - E < 0 C0 > S0 - E if S0 - E > 0

These conditions simply say that the lower bound on the call's value is either zero or S0 - E, whichever is bigger.

Our lower bound is called the intrinsic value of the option, and it is simply what the option would be worth if it were about to expire. With this definition, our discussion thus far can be restated as follows: at expiration, an option is worth its intrinsic value; it will generally be worth more than that anytime before expiration.

Figure 14.2 displays the upper and lower bounds on the value of a call option. Also plotted is a curve representing typical call option values for different stock prices prior to maturity. The exact shape and location of this curve depends on a number of factors. We begin our discussion of these factors in the next section.

intrinsic value

The lower bound of an option's value, or what the option would be worth if it were about to expire.

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