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Call Option

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $142 and IBM's stock currently trades at $148. The option premium is $7 per contract.
 
a. How much of the option premium is due to intrinsic value versus time value?
b. 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?
c. What is your net profit if IBM’s stock price decreases to $138?

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Answer #1

Answer (a)

Given

Market price =$148

Exercise price = $142

Option Premium = $7

Intrinsic Value = Market price - Exercise price = $148 - $142 = $6

Time Value = Option Premium - Intrinsic Value = $7 - $6

Answer (b)

Market price = $158

Exercise price = $142

Gross Payoff = Market price - Exercise price = $158 - $142 = $16

Net Profit = Gross pay off - Option Premium = $16- $7 = $9

Answer (c)

Market price = $138

Exercise price = $142

Gross pay off = NIL ( note 1)

Net Profit = Gross Pay off - Option Premium = 0 - 5 = -5

Note: -

The call option is exercised if " Market Price > Exercise Price " in the given case Exercise Price > Market price; hence the option is not exercised.


answered by: Blacketi
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