What are the intrinsic values and time premiums of the following call options if the price of the underlying stock is $35? What are the profits and losses to the buyers and the writers if the stock sells for $31 at the options' expiration? ? Strike Price Price of the Option $30 $7.50 $35 $3.00

Question

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Answer 1

Intrinsic value of the calls:Price of the stock ? strike price = intrinsic value       XYZ 30:    $35 ? 30 = $5       XYZ 35:    $35 ? 35 = $0?Time premium of the calls:     Price of the call ? the intrinsic value = time premium       XYZ 30:     $7.50 - 5.00 = $2.50       XYZ 35:     $3.00 - 0.00 = $3.00?If at expiration the price of the stock is $31, each option is worth its intrinsic value:      Calls:  XYZ 30:     $1                 XYZ 35:      0?Profit for the buyers (price at expiration minus the cost):      Calls:  XYZ 30    $1 - 7.50 = ($6.50)                 XYZ 35    $0 - 3.00 = ($3.00)?Profit for the writers:      Calls:  XYZ 30    $7.50 - 1.00 = $6.50                 XYZ 35    $3.00 - 0.00 = $3.00?Notice (1) how the price of each option equals the intrinsic value at expiration, (2) the time premium disappears at the option's expiration, and (3) the writers' profits equal the buyers' losses.