NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options
A stock trades at Rs 1,000. A call option with strike Rs 950 is quoted at a premium of Rs 70. Which statement about this option is correct?
The call is in the money by Rs 50, since spot of 1,000 exceeds strike of 950, so intrinsic value is Rs 50. The premium of Rs 70 less this intrinsic value leaves a time value of Rs 20.
- AIntrinsic value is Rs 50 and time value is Rs 20Correct
- BIntrinsic value is Rs 70 and time value is zero
- CIntrinsic value is zero and time value is Rs 70
- DIntrinsic value is Rs 20 and time value is Rs 50
Explanation
The call is in the money by 1,000 - 950 = Rs 50, which is its intrinsic value. Time value = premium - intrinsic value = 70 - 50 = Rs 20. Reversing the two figures is the common error.
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