What does intrinsic value represent in the context of stock options?

Intrinsic value in the context of stock options specifically refers to the difference between the current market price of the underlying stock and the exercise (or strike) price of the option. When a stock option has intrinsic value, it means that it is "in the money," meaning the market price is greater than the option's strike price for call options, or the market price is less than the strike price for put options.

This measure is crucial because it quantifies the actual economic benefit an option holder can realize if they choose to exercise the option at that point in time. In essence, intrinsic value reflects the potential profit available should the option be exercised immediately. Understanding this concept helps investors assess the viability and value of their options in relation to the underlying stock's performance in the market.