Chapter 15, Problem 2PS

Summary Introduction

Call option:

A call option is an agreement that gives the buyer the right to buy a stock at a pre-specified price within a pre-specified period. The stock on which the call option is provided is called the underlying asset.

Put option:

A put option is an agreement that gives the buyer the right to sell a stock at a pre-specified price within a pre-specified period. The stock on which the put option is provided is called the underlying asset.

In the money:

The transaction of an option is said to be in the money when the exercise of option causes cash inflows. On the other hands, the transaction of an option is said to be out of the money when the exercise of option causes cash outflows. The transaction of an option is said to be at the money or near the money when the exercise of option ends up with almost no profit and no loss.

To determine:

The reason for why the most actively traded options tend to be the ones that are near the money.