When is a put considered out of the money?

When is a put considered out of the money?

• A. When the market price is less than the exercise price
• B. When the market price is equal to the exercise price
• C. When the market price exceeds the exercise price
• D. When the market price is below minimum threshold

Answer: (C)

A put option is considered out of the money when the market price of the underlying asset exceeds the exercise price of the put option. This condition reflects a scenario where the holder of the put option would not exercise their right to sell the asset at the higher exercise price, as they could obtain a better price selling it in the market. If the market price is higher than the exercise price, there is no financial benefit to exercising the put option; thus, it becomes ineffective for the holder. In contrast, a put option is in the money when the market price is below the exercise price, allowing the holder to sell at a better price than what is available in the market. The definitions of in the money, at the money, and out of the money are crucial concepts for understanding options trading and financial derivatives.

A put option is considered out of the money when the market price of the underlying asset exceeds the exercise price of the put option. This condition reflects a scenario where the holder of the put option would not exercise their right to sell the asset at the higher exercise price, as they could obtain a better price selling it in the market.

If the market price is higher than the exercise price, there is no financial benefit to exercising the put option; thus, it becomes ineffective for the holder. In contrast, a put option is in the money when the market price is below the exercise price, allowing the holder to sell at a better price than what is available in the market. The definitions of in the money, at the money, and out of the money are crucial concepts for understanding options trading and financial derivatives.