For listed equity options, moneyness depends on the relationship between the market price of the underlying stock and the strike price. Which statement correctly describes when a call and when a put is in-the-money?
- AA call is in-the-money when the stock trades above the strike price, and a put is in-the-money when the stock trades below the strike price. Correct
- BA call is in-the-money when the stock trades below the strike price, and a put is in-the-money when the stock trades above the strike price.
- CBoth a call and a put are in-the-money whenever the stock trades above the strike price at any point before expiration.
- DBoth a call and a put are in-the-money when the stock trades exactly at the strike price, giving each contract intrinsic value.
Why A is correct: A call conveys the right to buy at the strike, so it holds intrinsic value only when the stock is above the strike; a put conveys the right to sell at the strike, so it holds intrinsic value only when the stock is below the strike.
Why B is wrong: This is tempting because it correctly senses that calls and puts are mirror images, but it reverses each one; a call gives the right to buy, so it only has intrinsic value when the stock is above the strike.
Why C is wrong: This is tempting because a call is indeed in-the-money above the strike, but it wrongly applies the same condition to a put, which has intrinsic value only when the stock is below the strike price.
Why D is wrong: This is tempting because the strike is the reference point for moneyness, but a contract trading exactly at the strike is at-the-money and carries no intrinsic value, not in-the-money.