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6. A call option with a strike price of $30 expires in six months. The current...

6. A call option with a strike price of $30 expires in six months. The current price of the stock is $40. What is the intrinsic value of the option? Should the option have a time premium? Is the option in-the-money or out-of-the-money?

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Answer #1

Call option is the right to buy a specified security at a specified price on a future.

Option premium has two components - intrinsic value and time value

Intrinsic value = Current stock price - Strike price

= $40 - $30

= $10

The option should have a time premium, since there option will expire in 6 months. Time period should be there to cover the risk of fluctuations in 6 months

The call option is known as in the money if the strike price is lower than the market and out of the money if it is higher.

Hence, the option is IN-THE-MONEY

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