Question

The price of a stock is $61 and a call option with a strike price of $60 sells for $5 (i.e.,

the option premium is $5.). *SHOW WORK*

(a) What is the option’s intrinsic value?

(b) What is the option’s time premium?

(c) You purchased the call for $5. If, at the expiration of the call, the price

of the stock is $66, what is the profit (or loss) from buying the call?

(d) You purchased the call for $5. If, at the expiration of the call, the price

of the stock is $46, what is the profit (or loss) from buying the call?

Answer #1

(A)Intrinsic Value = Price of Stock – Strike Price

= $61-$60

= $1

(b)Time premium = Option Premium – Intrinsic Value

= $5-$1

= $4

(c)Call Option is the right to buy a share at a specified price in future

Since the market price is higher than the strike price, option will be exercised

Profit/Loss = 66-60 – 5

= $1

(d) Since the market price is lower than the strike price, the option will not be exercised (it is better to buy the stock from the market)

Hence, profit/loss is equal to the premium paid

= -$5

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