Consider Triple Trice’s call option with a $25 strike price. The following table contains historical values for this option at different stock prices:
Stock Price Call Option Price
$25............. $ 300
30.............7.50
35..............12.00
40..............16.50
45..............21.00
50..............25.50
(1) Create a table that shows
(a) Stock price,
(b) Strike price,
(c) Exercise value,
(d) Option price, and
(e) The time value, which is the option’s price less its exercise value.
(2) What happens to the time value as the stock price rises? Why?
Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating high-fashion clothing. Because no one at Triple Trice is familiar with the basics of financial options, you have been asked to prepare a brief report that the firm’s executives can use to gain at least a cursory understanding of the topic.