Series 7 Exam Question 76: Answer and Explanation

Question: 76

ABC Oct 70 puts are trading for 6 and ABC is currently trading at 74. What is the time value of the Oct 70 put options?

• A. 0
• B. 2
• C. 4
• D. 6

Correct Answer: D

Explanation:

D. The premium (P) of an option is made up of intrinsic value (I) plus time value (T). With everything else being equal, the longer the time until expiration, the higher the premium. In this case, you're dealing with a put option, and put options go in the money when the price of the underlying security is below the exercise (strike) price. ABC is trading at 74 and the put option exercise price is 70, so the option is not in the money and has no intrinsic value. So to determine the time value, use the following equation:

P = I + T

6 = 0 + T

T = 6

The premium is 6 and there is no intrinsic value, so the premium is made up of all time value.