Series 7 Exam Question 385: Answer and Explanation
Question: 385
A TUV Oct 60 call is trading for 9 when TUV is at $65. What is the time value of this option?
- A. 0
- B. 4
- C. 5
- D. 9
Correct Answer: B
Explanation:
B. The easiest way to figure out the answer to this question is to use the equation P = I + T, where
P = the Premium of the option
I = the Intrinsic value of the option (how much it is in the money)
T = the Time value of the option (how much the investor is paying for the time to use the option)
P = I + T
9 = 5 + T
T = 4
First, put the premium of 9 into the equation. Next, because the option is 5 points in the money (call options go in the money when the price of the stock goes above the strike price), insert the intrinsic value of 5 in the equation. Because the premium is 9 and the option is 5 points in the money, the time value is 4.
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