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 $176 and IBM’s stock currently trades at $180. The option premium is $5 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 $190 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 $170? (Negative amount should be indicated by a minus sign.)

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $176 and IBM’s stock currently trades at $180. The option premium is $5 per contract.

Explanation / Answer

Time value = premium-intrinsic value = 5-4 = 1

2. Net profit = price-strike price-premium = 190-176-5 = 9

3. Net loss = premium = -5

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