Question

Before expiration, the time value of an at-the-money call option is usually?

1) Zero
2) Positive
3) Negative
4) Cannot be determined

Answer 1

The time value of an at-the-money call option before expiration is usually positive, reflecting the potential for profit due to the underlying asset's price movements.

Step-by-step explanation:

Before expiration, the time value of an at-the-money call option is usually positive. The time value represents the additional amount that traders are willing to pay over the intrinsic value of the option. Since an at-the-money option has an exercise price equal to the current price of the underlying asset, it does not have intrinsic value. However, there is a time value because there is a possibility that the option could become profitable before it expires due to the potential movement of the underlying asset's price.