ACD stock sells for $40.53. Which of the following options, written on ACD stock

Question

ACD stock sells for $40.53. Which of the following options, written on ACD stock, is expected to have the highest time value? Choose an answer and explain the reason for your choice.

A) A call option with a strike price of $40 and 1 month to expiration

B) A put option with $15 intrinsic value and 1 month to expiration

C) A call option with intrinsic value of 0.53 and 1 year to expiration

D) A put option with a strike price of $70 and 3 months to expiration

E) A call option with a strike price of $10 and 1 year to expiration

Explanation / Answer

D) A put option with a strike price of $70 and 3 months to expiration

as time value upto expiration = 70*e^(-3/12)

=$54.51

as value of put option = X*e^-t -S

=54.51-40.53

=$13.98

so it is larger than all options

hence ans:D) A put option with a strike price of $70 and 3 months to expiration

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