april put october put Use the option quote information shown here to answer the
ID: 2627765 • Letter: A
Question
april put
october put
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83. Are the call options in the money? What is the intrinsic value of an RWJ Corp. call option? (Do not round intermediate calculations.) Are the put options in the money? What is the intrinsic value of an RWJ Corp. put option? (Do not round intermediate calculations.) Intrinsic value 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 answers and double click the box with the question mark to empty the box for a wrong answers.)Explanation / Answer
a1 . Since market price of stock > Strike price
Therefore
They are ALL IN THE MONEY....
a2 . Intrinsic Value = $ (83-80) = $3
b1. Since owner can put stock at $80 when market price is $83 hence
the put options are ALL OUT OF MONEY...
b2. Intrinsic value = $0
c1. March is mispriced Since its selling less than intrinsic value.
October is mispriced because it is selling for less
than the earlier July (3.65 for 3.95) which shouldnt be
If the March call were to expire today, the arbitrage strategy would be to buy the
call for $2.80 and exercise the option to get one share of stock for $82.80 and
then turn around and sell it for $83 pocketing a profit of $83 - $82.80 = $.20
per share.
Eventually the arbitrage would get bid away with the call option being
bid up and the price of the stock going down.
To take advantage of the mispriced
put options, you would sell the July put for $3.90 and buy the October put
for $3.65 pocketing the difference of $.25.
The October long put covers the short July put, the arbitrage opportunity goes away as the July option gets bid
down and the October option gets bid up.
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