Stock question..The problem is below. Thank you.?

Question

Use the option quote info. shown here to answer the questions Calls Puts
Exp. StrikePrice Vol. Last Vol. Last
Mar 80 230 2.8 160 0.8
Apr 80 170 6 127 1.4
Jul 80 139 8.05 43 3.9
Oct 80 60 10.2 11 3.65
follow. The stock is currently selling for $83.

a. Are the call options in the money? What is the intrinsic value of an RWJ call option?
b. Are the put options in the money? What is the intrinsic value of an RWJ put option?
c. Two of the options are clearly mispriced. Which ones? At a mininum, What should the mispriced options sell for? Explain how you could profit from the mispricing in each case.

I dont understand what LAST is. And is the current price $83? How to know if its mispriced? Thank you.

Answer 1

Do your own homework

Answer 2

Given the way the numbers are run together I have to guess what values are given.

If the strike price is $80 the call options are in the money and have an intrinsic value of $3.00, the intrinsic value of the call options is $3.00, the put options are not in the money, and the intrinsic value of the put options is zero.

None of the options are clearly mispriced because the current prices (bid quote and ask quote) are not given, only the last price. Since the price of the stock at the time of the each of those trades is not given there is no way to tell if they were mispriced at the time of the last transaction.

Addendum:

The "last" (or "last sale") quote tells you the price paid the last time the option was traded. It does not tell you when that trade took place.

For example, the quotes for May BSX options at

http://finance.yahoo.com/q/os?s=BSX&m=2007-05-18

show the following information for the May $22.50 put option:

Last: 4.10
Bid: 6.80
Ask: 7.00

It also shows the stock trading at $15.59.

If you could buy the option at the "last" price it would be mispriced because you could

(1) buy the put for $410.
(2) buy 100 shares of the stock for $1,559.
(3) Exercise the put option, selling the stock for $2,250.

That would give you an immediate profit of $2,250 - ($410 + $1,559) = $281.

The reason the "last" quote is lower than the bid and ask quotes is that the stock was selling at a higher price the last time that option was traded.

If you bought the option today you would probably pay the "ask" quote ($7.00 per share 100 shares = $700).

Any American-style settlement option trading for less than its intrinsic value would be considered mispriced.