An option's value will never be less than zero because:
A)The intrinsic value is always less than zero.
B)The option seller is required to make up any shortfall faced by the option buyer.
C)An option holder will never make an additional payment to exercise the option.
D)The time value of the option is always less than zero.

Question

Quizplus · Accepted Answer

An option holder will never make an additional payment to exercise the option, meaning that the maximum loss for the holder is the premium paid for the option. Therefore, the option value cannot be less than zero. Option A is incorrect because the intrinsic value can never be less than zero for a call option, and can be less than zero for a put option if the strike price is higher than the underlying asset price. Option B is incorrect because the option seller is not required to make up any shortfall faced by the option buyer, but rather the buyer can only lose the premium paid for the option. Option D is incorrect because the time value of an option can be positive or negative, but it does not determine the minimum value of an option.

An Option's Value Will Never Be Less Than Zero Because