Series 7 Exam Question 385: Answer and Explanation

Question: 385

A TUV Oct 60 call is trading for 9 when TUV is at $65. What is the time value of this option?

• A. 0
• B. 4
• C. 5
• D. 9

Correct Answer: B

Explanation:

B. The easiest way to figure out the answer to this question is to use the equation P = I + T, where

P = the Premium of the option

I = the Intrinsic value of the option (how much it is in the money)

T = the Time value of the option (how much the investor is paying for the time to use the option)

P = I + T

9 = 5 + T

T = 4

First, put the premium of 9 into the equation. Next, because the option is 5 points in the money (call options go in the money when the price of the stock goes above the strike price), insert the intrinsic value of 5 in the equation. Because the premium is 9 and the option is 5 points in the money, the time value is 4.