Sam is considering purchasing a call option on ABC stock. The call has a premium of $3, an exercise price of $50, and ABC is trading at $51 per share. Which of the following statements about the call option is correct?
A) The call has an intrinsic value of $1 and a time value of $2.
B) The call has an intrinsic value of $0 and a time value of $3.
C) The call has an intrinsic value of $3 and a time value of $2.
D) The call has an intrinsic value of $0 and a time value of $1.

Question

Quizplus · Accepted Answer

The intrinsic value of a call option is the difference between the stock price and the exercise price, which is $51 - $50 = $1. The time value is the premium minus the intrinsic value, which is $3 - $1 = $2.

Sam Is Considering Purchasing a Call Option on ABC Stock