A stock option is in the money when which condition is true?

• A. The current stock price equals the exercise price.
• B. The current stock price is greater than the exercise price.
• C. The current stock price is less than the exercise price.
• D. The exercise price is negative.

Answer: (B)

In-the-money means the option has positive intrinsic value. For a call option, this happens when the current stock price exceeds the exercise (strike) price. If S > K, exercising gives you S - K, a positive payoff, so the option is in the money. If S = K, the payoff is zero (at the money). If S < K, there’s no gain from exercising (the payoff would be zero or negative), so it’s out of the money. The idea is that you’d only exercise a call if the stock price is higher than what you’d pay to buy it.