CFA Practice Question

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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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