Option Premium

C is correct. Marcus's maximum loss as an option buyer is limited to the total premium paid. Calculate: $3 premium per share × 100 shares per contract × 5 contracts = $1,500 total. Since XYZ expired at $41 (below the $45 strike price), the call options expire worthless out-of-the-money. Marcus loses the entire premium paid, which the seller keeps as profit.

A ($300) incorrectly calculates only 1 contract ($3 × 100 shares = $300) instead of 5 contracts. B ($1,200) uses an incorrect calculation that doesn't properly account for all contracts. D ($2,000) incorrectly attempts to calculate a loss based on the difference between strike and current price, but since the option expired out-of-the-money, it was never exercised and the only loss is the premium.

B is correct. Option premium is composed of two components: intrinsic value (the in-the-money amount if the option were exercised immediately) and time value (the additional value from the potential for favorable price movement before expiration). As expiration approaches, time value decays to zero, leaving only intrinsic value (if any).

A is incorrect because strike price and market price are used to calculate intrinsic value but are not themselves components of premium. C is incorrect because bid and ask prices represent the market quotes for buying or selling the option, not the components that make up the premium value. D uses incorrect terminology; these are not standard option pricing components.

A is correct. Calculate in steps:

1. Intrinsic Value (for call) = Current Price - Strike Price = $68 - $60 = $8
2. Premium = Intrinsic Value + Time Value
3. Therefore: Time Value = Premium - Intrinsic Value = $11 - $8 = $3

The option has $8 of intrinsic value (it is $8 in-the-money) and $3 of time value (value from time remaining until expiration).

B ($5) might result from calculation errors in determining intrinsic value. C ($8) incorrectly identifies the intrinsic value as the time value, reversing the components. D ($11) incorrectly identifies the entire premium as time value, ignoring that $8 is intrinsic value.

C is correct (the EXCEPT answer). This statement is FALSE. The premium is NON-REFUNDABLE once paid. Whether the option expires in-the-money or out-of-the-money, the buyer never receives a refund of the premium. If the option expires worthless (out-of-the-money), the buyer loses the entire premium and the seller keeps it as profit. The premium is the cost of the right to exercise, not a deposit.

A is accurate: the buyer pays premium to the seller upfront when the contract is opened (buyer pays, seller receives). B is accurate: the maximum loss for an option buyer is always limited to the premium paid, providing defined risk. D is accurate: time value erodes as expiration approaches (time decay or theta), accelerating in the final weeks before expiration. At expiration, time value is zero.

B is correct. Statements 1, 3, and 4 are accurate.

Statement 1 is TRUE: The premium is quoted per share ($4) but contracts control 100 shares, so the seller receives $4 × 100 = $400 total for one contract. This is critical for calculating actual dollar amounts.

Statement 2 is FALSE: This put option is OUT-of-the-money, not in-the-money. For put options, intrinsic value = Strike Price - Market Price. Since market ($52) is above strike ($50), there is ZERO intrinsic value. The entire $4 premium is time value. Puts only have intrinsic value when the market price is below the strike price.

Statement 3 is TRUE: If GHI rises to $60 (well above the $50 strike), the put option expires worthless and out-of-the-money. The buyer will not exercise the right to sell at $50 when the market is $60. The seller keeps the entire $400 premium as profit.

Statement 4 is TRUE: For option sellers, maximum profit is always limited to the premium received, regardless of how far the underlying moves in their favor. The seller cannot make more than the $400 premium collected upfront.