Products & Their RisksQuestion 91 of 398
An option premium is composed of:
a.Intrinsic value only
b.Time value only
c.Strike price plus dividends
d.Intrinsic value plus time value
Explanation
An option's premium equals its intrinsic value (the amount by which it is in-the-money) plus its time value (the extra amount reflecting the time remaining until expiration and volatility). An out-of-the-money option has zero intrinsic value, so its entire premium is time value, which erodes as expiration approaches.
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