CFA Practice Question

CFA Practice Question

After an earnings release, shares of Intelligent Semiconductor fall nearly 20% to $83.05. Noticing the precipitous drop, an options trader decides to purchase 2 spot month 85 calls on Intelligent Semiconductor for $3.30. Less than a week later, shares of Intelligent Semiconductor have retraced much of their fall, climbing to $96.75, and the trader is deciding whether to sell his long call options. Calculate the intrinsic value of these contracts on a per share basis.
A. $10.40
B. $11.75
C. $13.70
Explanation: The intrinsic value for option contracts can be thought of as the value of an option if it is exercised immediately, disregarding the premium paid. In this example, the call options have a strike price of 85, and the shares are trading at $96.75 when the trader is deciding whether to sell the contracts. We can see that these call contracts are definitely in-the-money. To calculate the intrinsic value of these calls, take the stock price when the trader is deciding to sell ($96.75) and subtract the option strike price ($85), which reveals an intrinsic value of $11.75. "Spot month" refers to option contracts which expire within the current month.

User Contributed Comments 1

User Comment
StanleyMo we also call lower bound
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