In reality, out‐of‐the‐money put options are more expensivethan at‐the‐money put options.True or False?

In reality, out‐of‐the‐money put options are more expensive than at‐the‐money put options.

True or False?

Expert Solution

REASON -

OUT-THE-MONEY options are less expensive than AT-THE-MONEY options.

OUT-THE-MONEY is also known as OTM, meaning an option has no intrinsic value, only extrinsic value

AND AT-THE-MONEY options are very close to having intrinsic value.

OUT-THE-MONEY options are cheaper than AT-THE-MONEY options since they need the stock to move significantly to become profitable.

The further OUT-THE-MONEY an option is, the cheaper it is because it becomes less likely that underlying will reach the distant strike price.

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