ou have taken a long position in a call option on IBM common stock. The option h
ID: 2800090 • Letter: O
Question
ou have taken a long position in a call option on IBM common stock. The option has an exercise price of $149 and IBM's stock currently trades at $152. The option premium is $4 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 $162 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 $142? (Negative amount should be indicated by a minus sign.)
ou have taken a long position in a call option on IBM common stock. The option has an exercise price of $149 and IBM's stock currently trades at $152. The option premium is $4 per contract.
Explanation / Answer
intrinsic value = 152 - 149 = 3
time value = 4 - 3 = 1
net profit if price increases to 162 = 162 - 149 - 4 = 9
net profit = -4 since the option expires worthless
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