SIE practice questionmediumOptions — Intrinsic Value
A call option has a strike price of $50 and the underlying stock is trading at $58. The option has a premium of $10. What is the intrinsic value?
- A$10
- B$8✓ Correct answer
- C$0
- D$2
Explanation
Why B — $8
Intrinsic value of a call = stock price - strike price (when positive). $58 - $50 = $8 intrinsic value. The remaining $2 of the $10 premium is time value ($10 premium - $8 intrinsic = $2 time value). A call has intrinsic value when the stock price exceeds the strike price (in-the-money).
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