Problem:
The exercise price on one of ORNE Corporation's call options is $30 and the price of the underlying stock is $35. The option will expire in 25 days. The option is currently selling for $5.50.
1. Calculate the option's exercise value?
2. What is the value of the premium over and above the exercise value? What does this value represent?
3. Is this an out-of-the money option, at-the-money, or in-the-money? Why?
4. What will happen to the value of the option if the underlying stock price changes to $30? Why?
5. Is this an example of a covered call option or a naked call option? Why?