Solved: Intrinsic value versus time value, Finance Basics

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Intrinsic value versus time value

Problem:

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $136 and IBM's stock currently trades at $140. The option premium is $5 per contract.

a) What is your net profit on the option if IBM's stock price increases to $150 at expiration of the option and you exercise the option?

b) How much of the option premium is due to intrinsic value versus time value?

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Finance Basics: Intrinsic value versus time value

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