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# Exercise Value & Price

The exercise price on one of ORNE Corporation's call options is \$30 and the price of the underlying stock is \$35. The option will expire in 25 days. The option is currently selling for \$5.50.

a. Calculate the option's exercise value?

b. What is the value of the premium over and above the exercise value? What does this value represent?

c. Is this an out-of-the money option, at-the-money, or in-the-money? Why?

d. What will happen to the value of the option if the underlying stock price changes to \$30? Why?

e. Is this an example of a covered call option or a naked call option? Why?

#### Solution Preview

Question A
The exercise value of an option can be found as:

Max(0, S - K)
where S is the price of the underlying stock and K is the strike price of the option. In this case, S=35 and K=30, so S-K = 5. Since 5 is greater than 0, then the exercise value is \$5.00

Question B
Since the option sells for \$5.50 and the exercise value is \$5.00, then the premium is \$0.50. This premium represents the volatility of the stock price and the time left to expiration of the option. Usually ...

#### Solution Summary

Discussion guides student through how to answer and gives solution with worded reasoning and displayed calculations. 371 words.

\$2.19