Question

Michael is considering buying either a call or a put option on ABC stock. Each of the options has an exercise price of $30 and ABC is trading at $34.50 per share. Which of the ensuing statements about the options is correct?

a) The put option is in the money, whereas the call option is out of the money.
b) The call option is in the money, whereas the put option is out of the money.
c) Both the put and the call option are in the money.
d) Both the put and the call option are out of the money.

Answer 1

The call option is in the money because it allows buying the stock at $30 when it's trading at $34.50. The put option is out of the money as it allows selling the stock at $30, less than the market price.

Step-by-step explanation:

If Michael is considering buying either a call or put option on ABC stock with an exercise price of $30 and the current stock price is $34.50, we can assess the situation of each option:

• The call option allows Michael to buy the stock at $30, which is beneficial because the stock is trading higher at $34.50. Therefore, the call option is in the money because exercising this option would allow him to purchase shares below the current market price.
• The put option, on the other hand, allows Michael to sell the stock at $30, which is not advantageous since the stock is trading at $34.50. Therefore, the put option is out of the money because exercising it would mean selling the shares for less than their current market value.

Therefore, the correct statement regarding the options is:
b) The call option is in the money, whereas the put option is out of the money.