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This chapter is from the book
Intrinsic and Time Value for Calls
Example 1.2 Where There is Intrinsic Value
Call Intrinsic Value |
Stock price |
$56.00 |
Call premium |
$7.33 |
Exercise Price |
$50 |
Time till expiration |
2 months |
|
Intrinsic Value |
$56 - $50 = $6.00 |
|
|
Call Time Value |
Stock price |
$56.00 |
Call premium |
$7.33 |
Exercise Price |
$50 |
Time till expiration |
2 months |
|
Time Value |
$7.33 - $6.00 = $1.33 |
|
Notice how: (Intrinsic Value + Time Value) = the option price |
Formulas for Intrinsic and Time Values for calls:
- Call Intrinsic Value = stock price–exercise price
- Call Time Value = call premium–call Intrinsic Value
The minimum Intrinsic Value is zero.
Example 1.3 Where There is no Intrinsic Value
Call Intrinsic Value |
Stock price |
$48.00 |
Call premium |
$0.75 |
Exercise Price |
$50 |
Time till expiration |
2 months |
|
Intrinsic Value |
$48 - $50 = $0.00 |
|
|
Call Time Value |
Stock price |
$48.00 |
Call premium |
$0.75 |
Exercise Price |
$50 |
Time till expiration |
2 months |
|
Time Value |
$0.75 - $0.00 = $0.75 |
|