Hi folks,
Here is the full background info:
And this is the question:
Why is the answer (B) and not (A)?
Thanks in advance.
Value of a put includes both intrinsic value and time value.
If premium on Put D was on the put expiration date, A would be accurate. There is the time value of the put option to be considered as well.
Since the premium put of $3.18 was measured prior to expiration and there is a component of time value to be considered, B is a more suitable answer in this case.
Thanks very much @Mitchi
But how do we know that the stock price of $26.82, is related to only the intrinsic value of the put?
Why must the stock price be above $26.82 if we are before the put expiration date?
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But how do we know that the stock price of $26.82, is related to only the intrinsic value of the put?
For an in-the-money put,
Intrinsic Value = Strike Price - Stock Price.
That’s how.