58. An investor sells an ABC Oct 35 call. ABC is currently trading at $42. Which of the following statements best describes the intrinsic value of this option and whether the option is in or out of the money?
Answer: D
The option has no intrinsic value and is out of the money.
The ABC Oct 35 call option is out of the money because the current trading price of ABC at $42 exceeds the strike price of $35. Since the option is not exercised at this point and has no intrinsic value, it is classified as out of the money.
A) The option has intrinsic value and is in the money.
This option is incorrect because for a call option to have intrinsic value, the underlying asset's price must be above the strike price. In this case, the option is not in the money since it does not allow for any profit if exercised, given that the market price exceeds the strike price.
B) The option has intrinsic value and is out of the money.
This statement is contradictory. An option that is out of the money has no intrinsic value by definition. As the ABC Oct 35 call option is out of the money, it cannot possess intrinsic value, making this option incorrect.
C) The option has no intrinsic value and is in the money.
This option is incorrect because it misclassifies the position of the call option. While it correctly states that the option has no intrinsic value, it erroneously claims that it is in the money. The current stock price of $42 indicates that the option is out of the money.
D) The option has no intrinsic value and is out of the money.
This statement is accurate. The call option's strike price of $35 is lower than the current trading price of $42, confirming that it does not have intrinsic value. Thus, it is categorized as out of the money.
Conclusion
The correct answer is option D, which accurately describes the intrinsic value and status of the option as being out of the money. All other options fail due to incorrect interpretations of intrinsic value and the relationship between the option and the underlying asset’s price. Understanding these terms is essential for evaluating options in trading contexts.