We have a stock selling for $90.00. There is a put option for this stock with a strike price of $85 and an option price of $1.20:
A) the intrinsic value of this option is $0.00 and the time value of the option is $1.20.
B) the intrinsic value of this option is $90.00 and the time value of the option is $1.20.
C) the intrinsic value of this option is -$5.00 and the time value of the option is $1.20.
D) you cannot determine the intrinsic value or time value of the option since the strike price is less than the underlying asset price.

Question

Quizplus · Accepted Answer

The intrinsic value of a put option is the difference between the strike price and the underlying asset price, only if the underlying asset price is below the strike price. In this case, since the stock is selling for $90.00 and the strike price of the option is $85, the intrinsic value of the option is $5.00, but since the option is selling for $1.20, the time value of the option is $1.20 ($1.20 = option price - intrinsic value). Therefore, the correct choice is A.

We Have a Stock Selling for $90