Question

•A call option has an exercise price of $50.

What is the value of the call option at expiration if the stock price is $35? $75?

•A put option has an exercise price of $30.

What is the value of the put option at expiration if the stock price is $25? $40?

Answer 1

Call Option Exercise Price = $ 50

The value of an option consists of two parts, the intrinsic value, and the time value. The time value of an option is the option premium minus the intrinsic value of the option. The intrinsic option value at any point in time is the difference between the underlying asset's existing stock price and the option's strike price. In this case, the option is at expiry and hence its time value component will be zero.

Therefore, when stock price = $ 35 , Option Value = 0 and when stock price is $ 75, Option Value = 75 - 50 = $ 25

Put Option Exercise Price = $ 30

When stock price is $ 25, Option Value = 30 - 25 = $ 5 and when stock price is $ 40, Option Value = $ 0