You have taken a long position in a call option on IBM common stock. The option

Question

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $144 and IBM's stock currently trades at $148. The option premium is $6 per contract.

How much of the option premium is due to intrinsic value versus time value?

What is your net profit on the option if IBM’s stock price increases to $158 at expiration of the option and you exercise the option? (Negative amount should be indicated by a minus sign.)

What is your net profit if IBM’s stock price decreases to $138? (Negative amount should be indicated by a minus sign.)

How much of the option premium is due to intrinsic value versus time value?

Explanation / Answer

A) Intrinsic value =$148 -$144

=$4

Time Value= $6-$4 =$2

b) Net profit due if IBm price increases to =(158-144) -6

= $8 would be net profit

C) If IPB stock price decreases to $138 then you will loose option premium

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