In: Finance
AMZN closed at $1,162.35 on 2017.12.01. A 2018.03.16 call option with a strike price of $1,000 sells for $182.30.
a) What is the intrinsic value of this option?
b) What is the time value of this option?
c) Your fancy computer estimates the volatility of AMZN as σ = 20.00 % and the risk free rate is r = 3.00 %. Given this information, what is the Black-Scholes value of this option?
d) Given the Black-Scholes value obtained in the previous problem, would you enter a long (buy) or short (sell/write) position in this option?
ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.
. a. The intrinsic value of an option:
The extent to which option is in the money (i.e the difference
between stock price and strike price).
Intrinsic value= (stock price- strike price).
=1162.35-1000
= $162.35
b. Value of option = intrinsic value + time value
182.30 = 162.35+ Time value.
Time value = $19.95
c. In the Image.
d. Actual Trading price = 182.30
Should be the trading price (as per black Scholes model) =
174.45
Since Actual is Costly. TAP THE SELL BUTTON. Sell/Write the
Option.