Series 7 Exam Question 78: Answer and Explanation

Question: 78

AAD Aug 35 calls are trading for 4 when AAD is at 36. What is the time value of these options?

• A. 0
• B. 1
• C. 2
• D. 3

Correct Answer: D

Explanation:

D. To determine the time value of an option, you can use the equation P = I + T. "P" equals the premium of the options, "I" equals the intrinsic value of the option (how much it's in the money), and "T" equals the time value of the option based on how much time there is until the option expires. Here's how it looks:

P = I + T

4 = 1 + T

T = 3

In this case, the premium of the option is 4. The intrinsic value is 1 because the call option is 1 point in the money. (Call options go in the money when the price of the underlying security goes above the strike price). This means that the time value equals 3 (4 - 1).