Asked by Jackson Brown on May 05, 2024
Verified
The current market price of a share of CSCO stock is $75. If a call option on this stock has a strike price of $70, the call
A) is out of the money.
B) is at the money.
C) sells for a higher price than if the market price of CSCO stock is $70.
D) is out of the money and sells for a higher price than if the market price of CSCO stock is $70.
E) is in the money and sells for a higher price than if the market price of CSCO stock is $70.
Strike Price
The predetermined price at which the holder of an option can buy (in a call option) or sell (in a put option) the underlying asset.
Call Option
An economic agreement granting the purchaser the option to acquire an asset at a predetermined price during a designated timeframe, without being compelled to do so.
Market Price
The existing cost at which an asset or service is being offered for buying or selling in the market.
- Analyze the economic gains and trading tactics suited to different market settings for call and put options.
Verified Answer
SD
Smith DesirMay 08, 2024
Final Answer :
E
Explanation :
A call option is "in the money" when the market price of the stock is above the strike price, which is the case here ($75 market price vs. $70 strike price). Additionally, the value of a call option increases as the market price of the underlying stock increases, making it sell for a higher price when the market price is $75 compared to when it is $70.
Learning Objectives
- Analyze the economic gains and trading tactics suited to different market settings for call and put options.