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Calculate the option exercise value

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Reference no: EM132642054

Question - The exercise price on a put option is $40 and the price of the underlying stock is also $40. The option will expire in 55 days. The option is currently selling for $0.50.

Required -

a. Calculate the option's exercise value?

b. Calculate the value of the premium over and above the exercise value? Why is an investor willing to pay more than the exercise value?

c. Is this an out-of-the money, at-the-money, or in-the-money option? Why?

d. What will happen to the market price of the option if the underlying stock price changes to $38? Will the exercise value or the time value change? Explain.

e. Explain the difference between a covered call option and a naked call option. Which option entails greater risk to the investor?

Reference no: EM132642054

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