Series 7 practice questioneasyOptions — Option Premiums
An option's premium is made up of which two components?
- AMarket value and book value
- BCurrent yield and capital gain
- CPar value and accrued interest
- DIntrinsic value and time value✓ Correct answer
Explanation
Why D — Intrinsic value and time value
An option premium consists of intrinsic value (the amount by which the option is in-the-money) and time value (the additional amount reflecting time remaining until expiration and volatility). As expiration approaches, time value decreases — a concept known as time decay.
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