What defines an "in-the-money" option?

What defines an "in-the-money" option?

• A. It has no intrinsic value
• B. It has a favorable strike price
• C. It is always profitable
• D. It is synonymous with out-of-the-money

Answer: (B)

An "in-the-money" option is defined by its favorable strike price, meaning that for a call option, the strike price is lower than the current market price of the underlying asset, allowing for potential profit if exercised. Conversely, for a put option, the strike price is higher than the market price, also indicating a profitable position if exercised. This distinction highlights the intrinsic value of an in-the-money option, which is present since exercising it would lead to a financial gain compared to the current market conditions. The other options do not accurately represent the characteristics of an in-the-money option. For example, an option cannot have no intrinsic value if it is considered in-the-money, as intrinsic value is a key aspect of this classification. While being in-the-money does suggest a higher likelihood of profitability, it does not guarantee profit because of factors like transaction costs or market movements. Lastly, the definition of in-the-money is not synonymous with out-of-the-money; they are opposing terms in options trading.

An "in-the-money" option is defined by its favorable strike price, meaning that for a call option, the strike price is lower than the current market price of the underlying asset, allowing for potential profit if exercised. Conversely, for a put option, the strike price is higher than the market price, also indicating a profitable position if exercised. This distinction highlights the intrinsic value of an in-the-money option, which is present since exercising it would lead to a financial gain compared to the current market conditions.

The other options do not accurately represent the characteristics of an in-the-money option. For example, an option cannot have no intrinsic value if it is considered in-the-money, as intrinsic value is a key aspect of this classification. While being in-the-money does suggest a higher likelihood of profitability, it does not guarantee profit because of factors like transaction costs or market movements. Lastly, the definition of in-the-money is not synonymous with out-of-the-money; they are opposing terms in options trading.