Using the resources at your campus or public library (or on the Internet), complete each of the following tasks.
a. Find an in-the-money call that has two or three months to expiration. (Select an equity option that is at least $2 or $3 in-the-money.) What’s the intrinsic value of this option, and what is its time value? Using the current market price of the underlying stock (the one listed with the option), determine what kind of dollar and percentage return the option would generate if the underlying stock goes up 10%. How about if the stock goes down 10%?
b. Repeat part a, but this time use an in-the-money put. (Choose an equity option that’s at least $2 or $3 in-the-money and has two or three months to expiration.) Answer the same questions as in part a.
c. Repeat once more the exercise in part a, but this time use an out-of-the-money call. (Select an equity option, at least $2 or $3 out-of-the-money with two or three months to expiration.) Answer the same questions.
d. Compare the valuation properties and performance characteristics of in-themoney calls and out-of-the-money calls (from parts a and c). Note some of the advantages and disadvantages of each.