Question

. A stock that is currently selling for $47 has the following six-month options outstanding:

	Strike Price	Market Price
Call Option	$45	$4
Call Option	$50	$1

1. Which option(s) is (are) in the money?

2. Which option(s) is (are) at the money?

3. Which option(s) is (are) out of the money?
   

4. What is the profit (loss) at expiration given different prices of the stock ($30, $35, $40, $40, $45, $50, $55, and $60) if the investor buys the call with $60 strike price?

Answer 1

. i)In the money options are those where you will get positive payoff if option is exercised immediately.

For Call options, if the strike price is lower than market value, it will be “in the money “ option.

You will have the right to buy at the strike price which is lower than market value. If you exercise the right , you will buy at price lower than the market and can sell at market price and make profit.

Call option with Strike Price $45 is “in the money”

ii)At the money is the option where the market value and the strike price are the same.

In this case there is no option at strike price of $47.There is no” at the money” option

iii) Out of the money options are those where you will get Negative payoff if option is exercised immediately.

For Call options, if the strike price is higher than market value, it will be “Out of the money “ option.

You will have the right to buy at the strike price which is higher than market value. If you exercise the right , you will buy at price higher than the market and sell at market price .There will be loss or negative payoff.

Call option with Strike Price $50 is “Out of the money”

iv)PURCHASE OF CALL WITH $60 STRIKE PRICE

The market price or premium of the option is not given.

We calculate the payoff , ignoring the premium.

PAYOFF for buying at Strike Price $60:

Assume Price at expiration =S

Payoff=Max.((S-60),0)

Price at expiration	Payoff
$30	$0
$35	$0
$40	$0
$45	$0
$50	$0
$55	$0
$60	$0

The amount of Loss=Premium paid