A customer holds a January call option with a strike price of $40. The current market price is $45. The intrinsic value is:
The intrinsic value of the call option is $5 per share.
The intrinsic value of a call option is calculated by subtracting the strike price from the current market price. In this case, with a strike price of $40 and a market price of $45, the intrinsic value is $45 - $40 = $5 per share.
This choice represents a scenario where the current market price is equal to or less than the strike price. Since the market price ($45) exceeds the strike price ($40), the call option holds value and cannot have an intrinsic value of $0.
This is the correct answer as it accurately reflects the calculation of intrinsic value for the call option. With a current market price of $45 and a strike price of $40, the intrinsic value is indeed $5 per share.
This choice incorrectly suggests that the intrinsic value equals the strike price. The intrinsic value is determined by the difference between the market price and the strike price, not simply the strike price itself. Therefore, this option does not represent the correct calculation.
This choice mistakenly indicates that the intrinsic value is equal to the current market price. Intrinsic value specifically measures the amount by which the option is in-the-money, which is the difference between the market price and the strike price, rather than the market price itself.
The intrinsic value of a call option is the amount by which the market price exceeds the strike price. In this example, with a strike price of $40 and a market price of $45, the intrinsic value is calculated as $5 per share. Understanding this concept is crucial for options trading, as it determines the immediate profit potential of exercising the option.
Related Questions
View allA registered representative (RR) receives a call from a customer askin...
In connection with an issuance of securities by a state, which of the...
Which of the following statements is true of a competitive municipal b...
A customer purchases 200 shares of ABC at $49.00 per share. Then the c...
On which of the following dates should a firm expect its stock price t...
- ✓ 500+ Practice Questions
- ✓ Detailed Explanations
- ✓ Progress Analytics
- ✓ Exam Simulations