Gypsy

An out-of-the-money put and an in-the-money call are defined as:

Put

Call

A) strike price > market price market price > strike price

B) market price > strike price    strike price > market price

C) market price > strike price    market price > strike price

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In-the-money put: strike > market; out-of-the-money put: market > strike.
In-the-money call: market > strike; out of the money call: strike > market.

Gypsy

A put option is “in-the-money” when:

A) there is no put option with a lower exercise price in the expiration series.

B) the stock price is lower than the exercise price of the option.

C) the stock price is higher than the exercise price of the option.

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The put option is in-the-money if the stock price is below the exercise price.

Gypsy

Which of the following statements about moneyness is most accurate? When the stock price is:

A) above the strike price, a put option is in-the-money.

B) below the strike price, a call option is in-the-money.

C) above the strike price, a put option is out-of-the-money.

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When the stock price is above the strike price, a put option is out-of-the-money.
When the stock price is below the strike price, a call option is out-of-the-money.

Gypsy

A put option currently has an option premium of $3 and a strike price of $40. The market price of the stock is $42 at expiration. The expiration day value of the option is:

A) $0.

B) $2.

C) $5.

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The expiration day value of the put is $0 because it is trading out-of the money.

Gypsy

Which of the following statements about uncovered call options is least accurate?

A) The loss potential to the writer is unlimited.

B) The most the writer can make is the premium plus the difference between the exercise price (X) and the stock price (S).

C) The profit potential to the holder is unlimited.

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The most the writer can make is the premium. If the writer wrote a covered out of the money call, then the writer would make the premium plus the increase in the stock's price X-S.

Gypsy

A call option that is in the money:

A) has an exercise price greater than the market price of the asset.

B) has an exercise price less than the market price of the asset.

C) has a value greater than its purchase price.

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A call option is in the money when the exercise price is less than the market price of the asset.

Gypsy

James Anthony has a short position in a put option with a strike price of $94. If the stock price is below $94 at expiration, what will happen to Anthony’s short position in the option?

A) The person who is long the put option will not exercise the put option.

B) He will let the option expire.

C) He will have the option exercised against him at $94 by the person who is long the put option.

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Anthony has sold the right to sell the stock at $94. That is, he received a payment upfront for the payer to have the right but not the obligation to sell the stock at $94. Because the option is in-the-money at expiration, MAX (0, X-S), the holder will exercise his right to sell at $94.

Gypsy

Bidco Corporation common stock has a market value of $30.00. Which statement about put and call options available on Bidco common is most accurate?

A) A call with a strike price of $25.00 is at-the-money.

B) A put with a strike price of $35.00 is in-the-money.

C) A put with a strike price of $20.00 has intrinsic value.

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A put is in-the-money when its exercise price is higher than the market value of the underlying asset. A put with a $35.00 strike price allows the trader to sell 100 shares of stock for $35.00 per share, which is $5.00 higher than the prevailing market value. This gives the put a value, hence, it is in-the-money. For a call to be in-the-money, its strike price would have to be lower than the market value of the underlying common stock, allowing the trader to purchase 100 shares at a price below the prevailing market value. At-the-money is when the strike price and asset market value are equal. A put with a strike price of $20.00 does not have intrinsic value because it is below the $30 price of the stock. It does have time value meaning it is worth something because there is the possibility the put will come into the money before it expires.

Gypsy

Consider a put option on Deter, Inc., with an exercise price of $45. The current stock price of Deter is $52. What is the intrinsic value of the put option, and is the put option at-the-money or out-of-the-money?

Intrinsic Value

Moneyness

A) $7    At-the-money

B) $7    Out-of-the-money

C) $0    Out-of-the-money

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The option has an intrinsic value of $0, because the stock price is above the exercise price. Put value is MAX (0, X-S). Equivalently, the option is out-of-the-money.

Gypsy

Over-the-counter options are:

A) very liquid.

B) the most important type in terms of volume.

C) largely unregulated.

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Over-the-counter options are largely unregulated, not liquid, and represent much less volume than exchange-traded options.