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?
The option has no intrinsic value and is out of the money.
An ABC Oct 35 call option allows the investor to buy shares at $35. Since ABC is currently trading at $42, this call option is considered in the money; however, the intrinsic value of the option is derived from the difference between the strike price and the current stock price. In this case, the option's intrinsic value is zero because the investor sold the call option at a strike price of $35, meaning it is not applicable for the seller.
This statement is incorrect because although the stock price is above the strike price, the seller of the call option does not own the option, and therefore the intrinsic value is not applicable to them. The intrinsic value is defined for the holder of the call option, who can benefit from the price difference.
This choice is contradictory, as an option cannot simultaneously have intrinsic value and be out of the money. An option is out of the money when the current price is less than the strike price, which is not the case here. Therefore, this statement is false.
This option is misleading because it incorrectly states that the option is in the money while claiming it has no intrinsic value. In reality, the option is in the money for the buyer, but it has no intrinsic value to the seller since they are obligated to sell at the strike price, not receive the benefit of the market price.
This statement accurately reflects that the option, while technically in the money for the buyer, does not provide intrinsic value to the seller, who has sold the call option. Therefore, it is correct to say that the option has no intrinsic value from the seller's perspective.
The intrinsic value of a call option is determined by the difference between the current stock price and the strike price, which is relevant only to the option holder. In this scenario, even though the option is in the money for the buyer, the seller has no intrinsic value tied to the option they sold. Hence, the correct interpretation is that the option has no intrinsic value and is out of the money for the seller.
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