For a given call option price, which of the following statements is correct?
A) The closer the strike price is to the current price of the underlying asset, the smaller the time value of the option.
B) The closer the strike price is to the current price of the underlying asset, the larger is the time value of the option.
C) As the strike price approaches the price of the underlying asset, the time value of the option approaches zero.
D) As the strike price approaches the price of the underlying asset, the intrinsic value of the option increases and the time value of the option decreases.

Question

Quizplus · Accepted Answer

The time value of an option represents the additional amount that traders are willing to pay over the intrinsic value, based on the probability that the option will end up in-the-money by expiration. The closer the strike price is to the current price of the underlying asset, the higher the uncertainty or the higher the chance the option has to move in-the-money, thus increasing its time value.

For a Given Call Option Price, Which of the Following