Trading in an option determines its value, and deducting its intrinsic value reveals the market's estimate of its time value.

Question

Quizplus · Accepted Answer

This statement is true. The price of an option is determined by its intrinsic value (the difference between the stock price and the strike price) and its time value (the market's estimate of how much time is left until expiration and the likelihood of the option reaching or exceeding its strike price). Subtracting the intrinsic value from the option's price reveals the market's estimate of its time value.

Trading in an Option Determines Its Value, and Deducting Its