Question

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $85.

                                                                                    Calls                                        Puts

Option              Expiration         Strike Price       Volume            Last                  Volume            Last

RWJ                 March              80                    230                  2.80                  160                  0.80

                        April                80                    170                  6.00                  127                  1.40

                        July                  80                    139                  8.50                  43                    3.90

                        October            80                    60                    10.20                11                    3.65

A) Are the call options in the money? What is the intrinsic value of an RWJ Corporation call option?

B) Are the put options in the money? What is the intrinsic value of an RWJ Corporation put option?

C) Two of the options are clearly mispriced. Which ones? At a minimum, what should the mispriced options sell for? Explain how you could profit from the mispricing in each case.

Answer 1