Question

You have written a call option on Walmart common stock. The option has an exercise price of $78, and Walmart's stock currently trades at $76. The option premium is $1.45 per contract a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart's stock price decreases to $74 and stays there until the option expires? c. What is your net profit on the option if Walmart's stock price increases to $84 at expiration of the option and the option holder exercises the option? (For all requirements, negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g.. 32.16) Complete this question by entering your answers in the tabs below. Req A Req B and C How much of the option premium is due to intrinsic value versus time value? Option Premium Intrinsic value Time value 055

Answer 1

1. If the Price of the underlying stock is $ 76 which is less than the Exercise Price of $ 78 then this option is Out of money. So Intrinsic value is $ 0.The Option premium is equal to the time value of the option i.e., $ 1.45.
2. If the price of the underlying stock is $74 which is less than the exercise price $ 78 and stays there until the option expires, the option holder will not exercise the option. Thus, your profit is $1.45 per share.
3. The option holder will come to you to exercise the option. So, you must by the shares at their current market price of $84 and then sell them to the option holder at the exercise price of $78.

Then Total profit = ($78 - $84) + $1.45 = - ($4.55) per share