Question

A call option has an intrinsic value of zero if the option is ________?

1) In the money
2) Out of the money
3) At the money
4) None of the above

Answer 1

A call option has an intrinsic value of zero if it is 'Out of the money,' meaning the market price of the asset is below the strike price of the call option.

Step-by-step explanation:

A call option has an intrinsic value of zero if the option is Out of the money (OTM). An option's intrinsic value is the difference between the underlying asset's market price and the option's strike price. For a call option, it is the amount that the market price exceeds the strike price. If the market price is below the strike price, the call option does not have intrinsic value because you wouldn't exercise the option to buy at a higher price than the market price, hence it is considered 'Out of the money'. When the option is 'In the money' (ITM), this means the market price is above the strike price, and 'At the money' (ATM) indicates the market price and strike price are equal.