Intrinsic and Time Value for Calls - Example 2: OTM
|
Call Intrinsic Value
|
|
Call Time Value
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Stock Price
|
$48.00
|
|
Stock Price
|
$48.00
|
|
Call Premium
|
0.75
|
Call Premium
|
0.75
|
|
Exercise Price
|
50.00
|
Exercise Price
|
50.00
|
|
Time to Expiration
|
2 months
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Time to Expiration
|
2 months
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|
|
|
|
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Intrinsic Value
|
48.00 - 50.00 = 0.00 |
Time Value
|
0.75 - 0.00 = 0.75 |
Notice how [intrinsic value + time value] = the option value
Formulae for intrinsic and time values for calls:
-
call intrinsic value = stock price - strike price
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call time value = call premium - call intrinsic value
The minimum intrinsic value is zero.