Investments, tenth edition

 Example  20.2 

Profits and Losses on a Put Option 

 An option is described as    in  the  money    when its exercise would produce a positive 

cash flow. Therefore, a call option is in the money when the asset price is greater than 

the exercise price, and a put option is in the money when the asset price is less than the 

exercise price. Conversely, a call is    out of the money    when the asset price is less than 

the exercise price; no one would exercise the right to purchase for the strike price an asset 

worth less than that amount. A put option is out of the money when the exercise price 

is less than the asset price. Options are    at  the  money    when the exercise price and asset 

price are equal. 

 Nevertheless, exercise of the call is optimal at expiration if the stock price exceeds the 

exercise price because the exercise proceeds will offset at least part of the purchase 

price. The call buyer will clear a profit if IBM is selling above $198.65 at the expiration 

date. At that stock price, the proceeds from exercise will just cover the original cost of 

the call. 

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  Options Markets: Introduction

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