Before expiration, the time value of a call option is equal to
A)zero.
B)the actual call price minus the intrinsic value of the call.
C)the intrinsic value of the call.
D)the actual call price plus the intrinsic value of the call.

Question

Quizplus · Accepted Answer

As the expiration approaches, the time value of the call option decreases and ultimately reaches zero at expiration. Therefore, before expiration, the time value of the call option is equal to the actual call price minus the intrinsic value of the call. This is because the intrinsic value measures how much profit can be made if the option were exercised immediately, while the time value reflects the premium paid for the possibility of additional profit due to a potential increase in the underlying asset's price before expiration. As the expiration date approaches, there is less time for the underlying asset's price to change, so the time value decreases, and the option becomes less valuable.

Before Expiration, the Time Value of a Call Option Is