CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

Nick is bullish on the Big Apple Index, which is currently at 3500. Since he has limited cash, he has decided to buy an at-the-money index option: option price is $10 per share. If the Index rises to 3508 at expiration, the option will be ______.
A. in the money
B. at the money
C. out of the money

User Contributed Comments 8

User Comment
Will1868 Is it not correct to also include the premium cost in this analysis: buy @ 3500 pay $10 -- At expration B/E price equals Strike + premium = 3510, then wouldn't the price of the index have to be at 3510 in order for the investor to breakeven on the trade?
EBIII you ar right will, I think the same. the option is at the money!
KINGas yep $3510 is breakeven price, excersice price is $3500 and the profit the investor will gain is $ -2. but she will exercise it anyway to get at least those $8 back. if it's excersiced then option is in the money.
mullrich Breakeven price doesn't matter when it comes to "in-the-money" and "out-of-the-money". All that matter is that the stock price is greater than or less than the exercise price....regardless of what the option cost you.

You, personally, may be out-of-the-money in an "in-the-money" situation when you factor in what you paid for the option.
andy4cfa If you check the definition of in-the-money or out-of-the-money, the premium cost is not included, because it is not relevant. Premium is then relevant when you calculate the profit/loss.
Shelton long call option: if S_t>X then "in the money"
jpducros is it necessarilly a call option ? Why wouldn't it be a Put ? Because he is bullish ? and thus expect a price rise?
cbeliveau being bullish is being optimistic; therefore he would purchase a call (the option to buy at set price at a later date) assuming the price will go up he will make out locking the price at this lower rate.
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