Explanation

For a put option:

• In the money: When the underlying asset price is below the strike price
• At the money: When the underlying asset price equals the strike price
• Out of the money: When the underlying asset price is above the strike price

Given:

• Strike price = $20.50
• Underlying price at expiration = $21.50
• Option premium = $1.00 (this is irrelevant for determining moneyness)

Analysis: Since $21.50 > $20.50, the underlying price is above the strike price. Therefore, the put option is out of the money.

Key points:

1. The option premium ($1.00) doesn't affect whether an option is in/at/out of the money - it only affects profitability.
2. At expiration, a put option has value only if the underlying price is below the strike price.
3. In this case, since $21.50 > $20.50, exercising the put option would mean selling at $20.50 when you could sell in the market for $21.50, which would result in a loss.

Correct answer: C (out of the money)