Explanation

For a put option:

• In-the-money (ITM): When the underlying asset price is less than the exercise price (strike price). The put option has intrinsic value because you can sell the asset at a higher price than the market price.
• At-the-money (ATM): When the underlying asset price is equal to the exercise price.
• Out-of-the-money (OTM): When the underlying asset price is greater than the exercise price. The put option has no intrinsic value because you would not want to sell the asset at a lower price than the market price.

Given the scenario:

• Price of underlying > Exercise price
• This means the put option is out of the money.

Why this is correct:

• If you hold a put option, you have the right to sell the underlying asset at the exercise price.
• If the market price is higher than the exercise price, you would not exercise the option because you could sell the asset at a higher price in the market.
• Therefore, the option has no intrinsic value and is out of the money.

Example:

• Put option with exercise price = $50
• Current underlying price = $60
• The put option is OTM because $60 > $50. You wouldn't exercise the right to sell at $50 when you could sell at $60 in the market.