Series 7 practice questionmediumOptions — Intrinsic Value Calculation
PQR stock trades at $82. A PQR 85 call has a premium of $4. What is the time value of this option?
- A$1
- B$3
- C$4✓ Correct answer
- D$7
Explanation
Why C — $4
The call is out-of-the-money (stock at $82, strike at $85), so intrinsic value is $0. When an option is out-of-the-money, the entire premium consists of time value. Therefore, the time value equals the full premium of $4. The premium reflects the possibility that the stock could rise above $85 before expiration.
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