Options Pricing
A stock is trading at $48. A call option with a strike price of $45 has a premium of $5. What is the time value of this option?
Intrinsic value = Market price - Strike price = $48 - $45 = $3. Time value = Premium - Intrinsic value = $5 - $3 = $2. The $5 premium consists of $3 intrinsic value and $2 time value.
Complete Analysis & Legal Rationale
Intrinsic value = Market price - Strike price = $48 - $45 = $3. Time value = Premium - Intrinsic value = $5 - $3 = $2. The $5 premium consists of $3 intrinsic value and $2 time value.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Does not match the governing securities rule described in the explanation.
Matches the verified teaching point in the explanation.
Does not match the governing securities rule described in the explanation.
Does not match the governing securities rule described in the explanation.
Official Standard: Governs options accounts, approvals, and related supervisory requirements (verify current text).
Official Standard: Outline-level citation: item maps to Series 7 topic coverage. Prefer a specific FINRA/SEC/MSRB rule citation in a later author pass.