Use the option quote information shown here to answer the question . The stock i

Question

Use the option quote information shown here to answer the question . The stock is currently selling for $85.

a) Are the call options in the money? What is the intrinsic value of RWJ Corp .call option?

b) Are the put options in the money? What is the intrinsic value of RWJ Corp.put option?

c) Two of the options are clearly mispriced. Which ones? At a minimum, what should the mispriced option sell for? Explain how you could profit from the mispricing in each case.

Please give me the answer and show how calculate step by step.

Explanation / Answer

a) All Call Options are in the money.

Reason:- Market price of stock is greater than the strike price.

The intrinsic value of RWJ Corp. Call option:- = 83 - 80 = $ 3

b) All Put Options are out of the money.

Reason:- Strike price is less than the market price. In other words, RWJ Corp. can only put the stock at $80 when the market price of stock is $83.

Accordingly, the intrinsic value of RWJ Corp. Put option:- = 0

c) October put option is clearly mispriced because it is selling for less than earlier July month put option (i.e., $3.65 as against earlier $3.95) and March call option is clearly mispriced because it is selling for less than the intrinsic value (i.e., $2.80 as against $ 3).

To take benefit of mispriced October put option, RWJ Corp. should sell July put for $3.90 and buy October put for $3.65, thus, pocketing the difference of $ 0.25 (3.90 - 3.65)

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