Financial Industry Regulatory Authority (FINRA) Practice Exam

When XYZ is trading at 40, what is the status of an XYZ 30 put sold at 3?

1. At the money

2. Out of the money

3. In the money

4. At parity

The correct answer is: Out of the money

The status of a put option is determined by comparing the strike price of the option to the current market price of the underlying asset. In this case, the XYZ put option has a strike price of 30. When XYZ is trading at 40, the put option is considered out of the money because the current market price (40) is above the strike price (30). For a put option, it becomes in the money when the market price is below the strike price, as it allows the holder to sell the underlying asset at a higher price than the market is offering. Since this is not the case here, the correct status of the XYZ 30 put option sold at 3 is that it is out of the money. Understanding the relationship between the strike price and the underlying asset’s price is crucial for evaluating options.