Canadian Securities Course (CSC) Practice Exam

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How is time value calculated for an option?

Option's premium + Intrinsic value
Option's premium - Intrinsic value
Option's premium * Intrinsic value
Option's premium / Intrinsic value

The correct answer is: Option's premium - Intrinsic value

The time value of an option is the difference between the option's premium and its intrinsic value. The intrinsic value is the difference between the current stock price and the strike price. Therefore, options with a higher intrinsic value will have a lower time value, and vice versa. Options with no intrinsic value, such as out-of-the-money options, will have all time value. It is important to consider both the premiums and intrinsic value when calculating the time value of an option.