Question

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $66.

  

						Calls							Puts
Option and NY Close	Expiration			Strike Price		Vol.			Last				Vol.			Last
RWJ
		Mar		60			236			3.80				166			3.90
		Apr		60			176			9.65				133			8.65
		Jul		60			145			10.50				49			11.75
		Oct		60			66			11.40				17			11.05

a-1.	Are the call options in the money?
	Out In

a-2.	What is the intrinsic value of an RWJ Corp. call option? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

b-1.	Are the put options in the money?
	In Out

b-2.	What is the intrinsic value of an RWJ Corp. put option contract? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

      

c.	Two of the options are clearly mispriced. Which ones? (Select all that apply)

  

	Mar call Apr call Oct call Mar put Oct put Apr put

Answer 1

Solution :-

a-1

A call option is in the money when the strike price is lesser than the stock price.

Stock price = 66

Strike price with different expiration of all call options = 60

so, the call options are in the money.

a-2

Intrinsic value of the call option = Stock price - strike price = 66 - 60 = $6

b-2

A put option is in the money when the strike price is higher than the stock price.

Strike price = 60

Stock price = 66

So, the put option is out of the money

b.2

Intrinsic value = strike price - stock price

Intrinsic value = 60 - 66 = -$6

Intrinsic value is considered as zero if it's negative.

C.

March call and July Put

March call option is priced less than March Put, though put option is out of the money. In the money options should be priced higher than out of the money options.

July Put is priced higher than October put, when the time to expiration is higher, the option price should be higher. Hence, October Put should be priced higher than July Put.

If there is any doubt please ask in comments.