Question

b. 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 case of call option, if the strike price of option is less than current stock price, then it is In the money option. Here, the stock price is $ 47 and there is only one option which is less than the stock price and that is the one with strike price of $ 45.

ii) In case of call option, if the strike price of option is equal to the current stock price, then it is at the money option. Here, the stock price $ 47 and there is no option which is having a strike price of $ 47.

iii) In case of call option, if the strike price of option is more than current stock price, then it is out of the money option. Here, the stock price is $ 47 and there is only one option which is more than the stock price and that is the one with strike price of $ 50.

iv) It is given that the stock price is $ 47 and here we are buying a call option with strike price of $ 60 by paying some premium amount. In order to have profit in this case, the stock price have go above the ( strike price + premium paid ). But here the stock prices at the expiration are  ($30, $35, $40, $40, $45, $50, $55, and $60) which is less than ( strike price + premium paid) . In all these cases, the loss will be limited to the premium paid for the call option.