Question

3. For a call option on IBM, if the current market price is $108 per share, the strike price is $95 per share, and the option value is $15 per share, how much is this option’s intrinsic value and time value?

4. Continue from #3, if the option is a put option, then what’s the intrinsic value and time value?

Answer 1

3. The intrinsic value is computed as shown below:

= current market price - strike price

= $ 108 - $ 95

= $ 13

The time value is computed as follows:

= option value - intrinsic value

= $ 15 - $ 13

= $ 2

4. The intrinsic value is computed as follows:

= Strike price - current market price

= $ 95 - $ 108

= - $ 13

But intrinsic value cant be negative, hence the same is $ 0.

The time value will be as follows:

= option value - intrinsic value

= $ 15 - $ 0

= $ 15

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