Question

1. Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83.

		Strike	Calls
Option	Expiration	Price	Vol.	Last
RWJ	Mar	80	230	1.80
	Apr	82	170	3.50
	Jul	84	139	4.45

1. Which options are in-the-money options? What are their intrinsic values?
2. Which options are out-of-money options? What are their intrinsic values?
3. Which option is mispriced?

Answer 1

a. The call options are said to be in the money, when the stock price > the strike price.

Stock price = $83

Mar $80 strike and Apr $82 strike call options are in the money because the stock price ($83) > the strike prices ($80 and $82)

For in the money call options, the intrinsic value = Stock price - strike price

Intrinsic value of Mar $80 strike call option = 83 - 80 = $3

Intrinsic value of Apr $82 strike call option = 83 - 82 = $1

b. The call options are said to be out of the money, when the stock price < the strike price.

Stock price = $83

Jul $84 strike call option is out of the money because the stock price ($83) < the strike price ($84)

Intrinsic value of Jul $84 strike call option is $0 because it is out of the money.

c. Mar $80 call option is mispriced because the option price should be at least the intrinsic value, which is $3, but it is trading at just $1.80.

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