Question

The three call options issued by Tesla Inc are listed below. Suppose that the current price of Tesla is $247.89.

Option	Option price	Strike price	Expiration date
A	$100.20	$150.00	October 25, 2019
B	$2.73	$280.00	November 1, 2019
C	$19.50	$250.00	December 20, 2019

Which option has the highest time value? Discuss the determinants of the time value based on the moneyness and time to expiration.

Answer 1

Call option

Option price = Time value + Intrinsic value

Intrinsic value = Value of the option if it is exercised today.

If Spot price > Strike price

Intrinsic value = Spot price - strike price

If Spot price < Strike price

Intrinsic value = 0

Option A: Spot price > Strike price

100.20 = Time value + (247.89 - 150)

Time value = 100.20 - 97.89

Time value = $2.31

Option B: Spot price < Strike price

2.73 = Time value + 0

Time value = $2.73

Option C: Spot price < Strike price

19.50 = Time value + 0

Time value = $19.50

Option C has the highest time value.

If the option is either deep in the money (spot price is much greater than the strike price) or deep out of the money (spot price is much lower than the strike price), then the time value of the option is lower.

At the money (spot = strike) or near the money (spot is slightly greater than or less than strike) then the time value of the option is higher.

If the time to expiration is less, then the time value will be lower and if the time to expiration is more, then the time will be higher.

Can you please upvote? Thank You :-)