Question

Which one of the following is true for in the money, out of the money, and at the money option contracts?

a. Out of the money options are worthless.

b. Given everything else being the same (the underlying stock, expiration date), in the money put options have higher strike prices than at the money put options.

c. At the money options will always remain at the money before expiration date.

d. None of the above.

Answer 1

Option (b) : Given everything else being the same (the underlying stock, expiration date), in the money put options have higher strike prices than at the money put options.

Explanation:

~ In the money options are those options that are generating a net inflow and are in favourable situation.

~ At the money options are those options that are at No profit No loss point

~ The value of Put is calculated as follows:

Value of PUT Options = Strike Prike - Stock Price

~ For in the money Put Option, the Strike Price > Stock Price

~ For at the money Put Option, the Strike Price = Stock Price

~ Now, it is evident from the above formula that the Strike Price in case of "in the money" Put options will be higher than the Strike Price in case of "at the money" Put options, given that the Underlying Stock and Expiration is SAME.