The exercise price on a call option is $30 and the price of the underlying stock

Question

The exercise price on a call option is $30 and the price of the underlying stock is $35. The option will expire in 35 days. The option is currently selling for $5.75.

a. Calculate the option's exercise value?

b. Calculate the value of the premium over and above the exercise value?

c. Is this an out-of-the money, at-the-money, or in-the-money option?  

d. What will happen to the time and exercise value of the option if the underlying stock price changes to $30?  

e. Is this an example of a covered call option or a naked call option?  

Explanation / Answer

A. Exercise value = Market price - Strike price = 35 - 30 = $5

B. Value of premium over exercise value = Premium amount - exercise value = 5.75 - 5 = $0.75

C. Since, strike price of the call option is less than the current marker price of the underlying thus it is the In-the-money call option.

D. If the market price of the undrlying reduce to $30 the call option will have 0 exercise value and it will be at the money call option.

E. In covered call option asset and call option is purchase simultaneously but since here only call option is purchased and no stock is purchased it is an example of naked call option.

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