Question of the Week

The Standard and Poor’s 100 index closed on August 20 at 536.04. The Wall Street Journal quotes the closing premium for the OEX September 510 call at 28.90. What is the time value of the contract?

a) 18.90
b) 7.14
c) 2.86
d) 26.04


Answer:

The correct answer is c.

First, remember that OEX is the symbol for the S&P 100 index. The premium in an options contract is composed of both intrinsic value and time value. The intrinsic value of the Sept 510 call is 26.04 since the index closed at 536.04. In a call, subtract the strike price from the market price to find intrinsic value (536.04-510 = 26.04). Subtract the intrinsic value from the premium to find the time value (28.90-26.04 = 2.86).



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