Practice Problem – Out-of-the-Money Call Option

Practice Question

Intro to Finance
Options
Call and Puts
MCQs

An out-of-the-money call option is one that:

A) has an exercise price below the current market price of the underlying security.

B) should not be exercised.

C) has an exercise price above the current market price of the underlying security.

D) Both A and B.

E) Both B and C.

Answer +
E) Both B and C.
Explanation +
1. Definition of Out-of-the-Money Call Option

A call option is considered out-of-the-money when the strike price is higher than the market price of the underlying stock. In this case, exercising the option would be unprofitable.

2. Evaluation of Options
  • Option A: Incorrect. This describes an "in-the-money" call option.
  • Option B: Correct. The option should not be exercised since it results in a loss.
  • Option C: Correct. The strike price is above the market price — this defines "out-of-the-money."
3. Conclusion

Option E is the correct choice, as both B and C accurately describe an out-of-the-money call option.