Question

n late November, Karen bought FIB February puts with a strike price of $25. The ask price of the put was $2. The current price of FIB shares is $23.40. The time value of the put is

		$0.00
		$0.20
		$0.60
		$2.00

Answer 1

Solution :-

Here, in the question given details

Strike price of the put option = $ 25

Put option premium = $ 2

Current price of FIB shares =$23.40

Since the strike price is greater than current stock price of FIB, the put option is IN THE MONEY , the buyer will excercise the option.

Hence , Intrinsic value of the put option = Strike price - current . price

ie. = $25- $23.40

ie. = $ 1.6

Therefore , time value of put option = option premium - intrinsic value of put option

ie. $2 - $1.6

ie. = $0.4.

Note :-

As per the concept , the answer should.be $ 0.4, but i could not find 0.4$ in the options available for answer.

Intrinsic value is what buyer receive, if he decided to excercie the option.

Time value of option is the additional amount an investor is willing to pay over the amount of intrinsic value. An investor is willing to pay this because an option could increase in value before its expiration date.

In nutshell, option premium is the sum of intrinsic value and time value of option.