Question

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $75.

  

						Calls							Puts
Option and NY Close	Expiration			Strike Price		Vol.			Last				Vol.			Last
RWJ
		Mar		70			245			4.70				175			4.80
		Apr		70			185			10.55				142			9.55
		Jul		70			154			11.40				58			13.10
		Oct		70			75			12.30				26			11.95

a-1.

Are the call options in the money?

	In
	Out

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.)

Intrinsic value

$

  

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.)

Intrinsic value

$

  

c.

Two of the options are clearly mispriced. Which ones? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

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

Answer 1

Call option is the right to buy a specified security at a specified price on a future date

Put option is the right to buy a specified security at a specified price on a future date

Call options are in the money when strike price is lower than the market price

a-1 IN

a-2 Intrinsic Value = Market Price – Strike Price = $75-$70 = $5

b-1 Put options are in the money when market price is lower than the strike price

OUT

b-2 Intrinsic Value = higher of Strike price – market price,0

= $0

c.Mispriced options are:

March Call: Since option premium = intrinsic value + time value, it should not be less than $5

Oct Put: Since expiry is at later date, premium should be higher than July Put premium