Answer-first summary for fast verification
Answer: The time value of the first call must be greater than (or equal to) the time value of the second call
**Correct answer: C** For two calls on the same non-dividend-paying stock with the same maturity: - A lower strike call must have a higher price, so **c1 > c2** is true. - Since the stock price is **$14**: - Intrinsic value of **c1** = max(14 - 11, 0) = **$3** - Intrinsic value of **c2** = max(14 - 14, 0) = **$0** - So the intrinsic value difference is exactly **$3**, making **B** true. - The spread value cannot exceed the strike difference, so **c1 - c2 <= 3** is true. The false statement is **C** because the lower-strike call does **not** necessarily have greater time value. In fact, the higher-strike call often has greater time value because more of the lower-strike call’s price is already captured by intrinsic value.
Author: Manit Arora
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Question-179.1. Assume two European call options, c1 and c2 on the same non-dividend-paying stock. Both options have one year to expiration (the options are identical except for their strike prices). The current stock price (S) is $14.00. The first call option, c1, has a strike price of $11.00 and the second call option, c2, has a strike price of $14.00; i.e., c1(K) = 11, c2(K) = 14. EACH of the following is true EXCEPT for which statement?
A
c1 > c2; value of first call must be greater than value of second call
B
The intrinsic value of the first call is exactly $3.00 greater than the intrinsic value of the second call
C
The time value of the first call must be greater than (or equal to) the time value of the second call
D
c1 - c2 <= 3.0; difference in call values must be less than or equal to three
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