Question

The Chicago Board Options Exchange (CBOE) is one of the world’s largest options exchanges. CBOE and other options exchanges trade contracts that give buyers and sellers the right to trade investment assets at a specific price within a specific time period.

A   option gives the option holder the right to sell an asset at a fixed price during a particular period. The fixed price that the asset may be sold at is called the exercise price.

The following table shows the options quotation in U.S. dollars for Purple Pigeon Bird Seed Company for June 30 of this year.

Option	Closing Price	Strike Price	Calls–Last Quote September	Puts–Last Quote September
1	$41.50	$45.50	$4.00	$4.40
2	$41.50	$37.50	$6.00	$2.40
3	$41.50	$47.50	$3.20	$5.20

If you could exercise the options listed only on the expiration date (the third Friday of September), then these options would be   options.

Assume that the options listed in the table are American options. Which of the put options for Purple Pigeon Bird Seed Company listed in the table are in-the-money on June 30?

Option 1 and option 3

Only option 2

All of the options

None of the options

Answer 1

An American Option is one which may be exercised at any time up to and including the contract's expiration date while European options can be exercised only on contract's expiration date.

An "in the money" put option is one where its strike price is greater than the market price of the underlying asset.

Although options listed are American options but they could be exercised only on the expiration date. Hence, put options - option 1 and option 3 are in the money because-

Option 1 : Strike price - Closing Price = $45.50 - $41.50 = $4

Option 3 : Strike price - Closing Price = $47.50 - $41.50 = $6

While put option - option 2 is out of money because-

Option 2 : Strike price - Closing Price = $37.50 - $41.50 = -$4