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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options

Which statement about an option's premium is correct?

An at-the-money option has zero time value at expiry. Premium equals intrinsic value plus time value, and at expiry no time remains while an at-the-money option has no intrinsic value, so its premium falls to zero.

  1. ATime value of an at-the-money option is zero at expiryCorrect
  2. BA deep in-the-money call has no intrinsic value
  3. CTime value equals premium plus intrinsic value
  4. DAn out-of-the-money option has intrinsic value equal to its premium

Explanation

Premium = intrinsic value + time value. At expiry no time remains, so an at-the-money option has zero intrinsic and zero time value. A deep ITM call has high intrinsic value, time value is premium minus intrinsic, and OTM options have zero intrinsic value.

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