Question

An investor owns a call option on XYZ that expires in three months and has a strike price of $130 per share. The current price of XYZ stock is $125 per share, and the current market price of the option is 31/8. Which of the following actions should the investor take, and why? A) Exercise the option, because the market value of the option ($3⅛) is above zero. B) Exercise the option, because the excess of the strike price over the market price would result in an immediate gain of $5 per share. C) Do not exercise the option, because the intrinsic value of the option ($128 ⅛) is less than the strike price of the option ($130). D) Do not exercise the option, because the strike price exceeds the market price and the transaction would result in an immediate loss.

          An investor owns a call option on XYZ that expires in three months and has a strike price of $130 per share. The current price of XYZ stock is $125 per share, and the current market price of the option is 31/8. Which of the following actions should the investor take, and why?
A)
Exercise the option, because the market value of the option ($3⅛) is above zero.
B)
Exercise the option, because the excess of the strike price over the market price would result in an immediate gain of $5 per share.
C)
Do not exercise the option, because the intrinsic value of the option ($128 ⅛) is less than the strike price of the option ($130).
D)
Do not exercise the option, because the strike price exceeds the market price and the transaction would result in an immediate loss.

Added by Brandon G.

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