Short Answer 
The option premium consists of intrinsic value and time value, where intrinsic value is calculated as the current stock price minus the strike price, resulting in $2 for the ABC June 20 call option. The time value is determined by subtracting the intrinsic value from the option premium, yielding a time value of $1.5, reflecting future potential price movement before expiration.
Step 1: Understand Option Components
To grasp the concept of the time value of options, one must recognize that the option premium consists of two parts: intrinsic value and time value. The intrinsic value represents the inherent worth of the option, based on how much the underlying asset exceeds the strike price. The time value reflects the potential for the option to gain value before expiration.
Step 2: Calculate Intrinsic Value
The intrinsic value of a call option is determined by comparing the stock’s current price to the option’s strike price. For this scenario, the vital details are:
- Current Stock Price: $22
- Strike Price: $20
- Intrinsic Value Calculation: $22 – $20 = $2
This $2 represents the intrinsic value of the ABC June 20 call option because the stock is trading above the strike price.
Step 3: Calculate Time Value
Now that we have the intrinsic value, calculating the time value involves a straightforward subtraction from the total option premium. The relevant figures are:
- Option Premium: $3.5
- Intrinsic Value: $2
- Time Value Calculation: $3.5 – $2 = $1.5
Thus, the time value of the ABC June 20 call option is $1.5, indicating the additional value attributable to potential future price movements before expiration.