Which one of the following is the lower price bound for the intrinsic value of an American put option on a stock?
A)0
B)strike price
C)stock price
D)Max(S − K, 0)
E)Max(K − S, 0)

Question

Quizplus · Accepted Answer

The intrinsic value of an American put option is the value if it were exercised today. For a put option, this is the maximum of the strike price minus the stock price (K − S) and 0, because the option gives the right to sell at the strike price. If the stock price is above the strike price, the intrinsic value is 0, as exercising the option would not be beneficial. If the stock price is below the strike price, the intrinsic value is K − S, representing the profit from exercising the option.

Which One of the Following Is the Lower Price Bound