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SIE practice questionmediumOptions — Put Intrinsic Value

A put option with a strike price of $65 is trading at $9 when the underlying stock is at $60. What is the time value of this option?

  1. A$5
  2. B$9
  3. C$0
  4. D$4✓ Correct answer
Explanation

Why D — $4

For a put: intrinsic value = strike price - stock price = $65 - $60 = $5. Time value = premium - intrinsic value = $9 - $5 = $4. The $5 intrinsic value represents the immediate exercise value; the $4 time value represents the chance the option could become even more valuable before expiration.

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