Question

1. A put option has strike price $75 and 3 months to expiration. The underlying stock...

1. A put option has strike price $75 and 3 months to expiration. The underlying stock price is currently $71. The option premium is $10. "What is the time value of the put option?

Would this just be 0? Or: 71-75=-4 then 10-(-4)= 14?

2. The spot price of the market index is $900. After 3 months, the market index is priced at $920. An investor had a long call option on the index at a strike price of $930 with an expiration at 3 months. At the 3 month expiration, what is the investor's payoff from the call option?

a. $20 gain

b. $0

c. $10 loss

d. $10 gain

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Homework Answers

Answer #1

Answer(1): Time value of Option = Premium - Intrinsic value

Intrinsic value of Put option = Strike price - Spot price

Intrinsic value of Put option: 75 - 71 = $4

Time value = 10 - 4

Time value = $6

Answer(2): Given: Spot price = $900, Index = $920, Call Strike = $930

Investor's payoff from the call option = max [0, Spot - Strike]

investor's payoff from the call option = max[0, 920-930]

investor's payoff from the call option = $0

Option "b" is correct.

As the Index is lower than the strike so Call buyer will not exercise his right and let it go. Maximum loss will be of the premium paid only.

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