Question

On April 10, 2018, Facebook’s stock was trading at $165. Consider the following four call options:

1) strike price= $165, expiring on May 4, price = $7.7

2) strike price= $160, expiring on May 4, price = $11.0

3) strike price= $165, expiring on Aug 17, price = $13.0

4) strike price= $160, expiring on Aug 17, price = $15.8

Which of the following statements is NOT true?

a) The intrinsic value of option 1) is zero.

b) Option 4) is worth more than option 2) because 2) has greater intrinsic value

c) The time value of option 3) is $13

d) The time value of option 2) is $6

Answer 1

The correct answer is option (b) i.e.  Option 4) is worth more than option 2) because 2) has greater intrinsic value

Intrinsic Value = Spot - Strike Price

Time Value = Option Premium - Intrinsic Value

a) Intrinsic value of option 1 = 165-165= 0 , hence true

b) option 4 intrinsic value = 165-160 ,5 whereas option 2 intrinsic value = 165-160 =5, option 4 doesnot has greater intrinsic value, hence false.

c) The time value of option 3,

Intrinsic Value of option 3 =165-165= 0, time value of option 3 = 13-0 = 13, hence true

d) The time value of option 2,

Intrinsic Value of option 2 =165-160= 5, time value of option 2 = 11-5 = 6, hence true

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answered by: anonymous