Question

You have taken a long position in a call option on IBM common
stock. The option has an exercise price of $176 and IBM’s stock
currently trades at $180. The option premium is $5 per contract.
(LG 10-4)

How much of the option premium is due to intrinsic value
versus time value?

page 350

What is your net profit on the option if IBM’s stock price
increases to $190 at expiration of the option and you exercise the
option?

What is your net profit if IBM’s stock price decreases to
$170?

Answer #1

Exercise Price of Long Call - $ 180

**Calculation of Option Premium Due to Intrinsic
Value**

Intrinsic Value = (Current Price - Exercise Price)

=$180-$176

= $ 4

Time value of option is i.e. =(Call premium - Intrinsic Value)

= $1 ($5-$4)

Net profit on the option if stock price increases to $190

**If the IBM’s stock price increases to 190 $**

Then i would like to exercise the call option and will buy the share at $176 giving me a Net profit of

= (Share price - Exercise Price) - Call Premium

=(190-176) - 5

= **$ 9**

If the IBM’s stock price is 170 $ then we would not the exercise the call option and will buy it from market at 170$ and the call option will lapse

There will be **No Net profit if IBM’s stock price is
170$**

However the call premium of 5$ would have been already paid so
the **cost will be 5$**

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