A stock currently sells for $75 per share.A call option on the stock with an exercise price $70 currently sells for $5.50.The call option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.

Question

Quizplus · Accepted Answer

The call option is in-the-money because the exercise price of $70 is lower than the current market price of $75. This means that the holder of the call option can purchase the stock at $70 and immediately sell it at the market price of $75, generating an immediate profit of $5 per share. The premium of $5.50 per share paid for the call option represents the cost of the right to buy the stock at $70, making the breakeven price $75.50 ($70 + $5.50). Therefore, the call option is not at-the-money or out-of-the-money.

A Stock Currently Sells for $75 Per Share