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Let’s assume that December corn futures are trading at $3.70 per bushel. You pay a premium of 25 cents per bushel for a 360 December put. What is the time value of this option?
a. 10 cents per bushel
b. 25 cents per bushel
c. $3.60 per bushel
d. the time value cannot be calculated
Answer (b): An option premium is made up of two components; intrinsic value (if any) and time value. In this case, when the futures price ($3.70) is trading higher than the strike price of the put (360), there is no intrinsic value – the option is trading 10 cents “out-of-the-money.” If there is no intrinsic value, then the entire premium of 25 cents per bushel can be viewed as time value.