Option "Moneyness"
| Moneyness | Call Options | Put Options |
|---|---|---|
| ITM | Stock > Strike | Stock < Strike |
| ATM | Stock = Strike | Stock = Strike |
| OTM | Stock < Strike | Stock > Strike |
Quite often you will hear the terms "in-the-money", "at-the-money" and "out-of-the-money" or ITM, ATM and OTM. These terms all refer to an options Intrinsic Value.
The strike price of an option compared to the current stock price is what determines the option's Intrinsic Value and hence determines whether the option is in, at or out of the money. If a call option's strike price is less than the current market price of the underlying asset it is said to be in-the-money - as the option buyer can exercise and make an instant profit.
Consequently, if a calls strike price is higher than the current underlying asset it is said to be out-of-the-money because it has no Intrinsic Value. Confused? Take a look at these quick formulas;
Call Options
In-the-Money = Strike price less than underlying price
At-the-Money = Strike price is the same as the underlying price
Out-of-the-Money = Strike price is greater than the underlying price
Put Options
In-the-Money = Strike price is greater than the underlying price
At-the-Money = Strike price is the same as the underlying price
Out-of-the-Money = Strike price is less than the underlying price
25 Comments
Peter February 14th, 2013 at 4:48pm
Hi, no problem with the questions - I'm happy to help!
When the market opens, if you want to exit your position immediately you will sell to the bid price. However, if you're not in a rush to liquidate you can place a sell order for the option at a price above the bid and leave it in the market as a working order.
If your order is sitting on the offer and the market moves up, somebody may buy from you at the ask price.
Yep, you need to subtract your premium and comms to calculate your profit.
For face to face option training, you can reach out to;
Trading Academy
Options University
Poiter February 14th, 2013 at 3:23pm
Thank you for taking your times to answer novice questions. I have a virtual trading account with cboe. I'm currently trading bidu $90 strike call Apr13 at 8.10, 5 contracts. It costs me $4050.
At market close today, bidu closed at 95.23. The chain shows for the 90 call strike, Last: 8.31, Bid: 8.05 and Ask 8.2. Now if I'm going to sell this call tomorrow when market opens, I'd be selling it at 8.05 or whatever the Bid price is, am I correct?
If I'm going to exercise this call, bidu has to hit $99 for me to make a profit. I have to subtract the option premium plus broker's commission.
Is there a good site that you can recommend to trade paper money or virtual money? I live in San Diego and looking for a class that teaches options trading in live person. Do you know of any?
Thanks again.
Peter February 13th, 2013 at 5:50pm
You don't need to exercise the option to realize the profit.
You can sell the call options back in the market, where the price difference will be your profit. If the calls are in the money on the day of expiration you will be able to exit the call at intrinsic value and make your $2,000.
Also, you don't have to call your broker to exercise the options once they have expired - this will be handled automatically. Although, I'm not sure what would happen if you don't have enough funds to hande the exercise - maybe your broker would loan you the money for the position until you exit. I know that Interactive Brokers has the capacity to do this as they margin you a certain amount based on your existing capital.
Poiter February 13th, 2013 at 12:04pm
Hello Peter
I have a couple of novice questions regarding call options. Bidu is currently trading at $96.32. I have $3000 in my account. For discussion purposes, let's say I buy a $100 strike call options expirating in Sept 2013. September rolls around, bidu is trading $120. I want to exercise the options to buy bidu at $100 strike, but I only have $3000 in my trading account. Can I buy the call options and immediately sell the 100 shares at $120? So I would be ITM and this would give me a $2000 profit minus options price minus commission. Do I have to call my broker to execute the trade or can I just leave it alone and let it takes care of itself?
Thanks.
Peter October 29th, 2012 at 4:33am
Hi Tan,
1. You don't need to own the stock before shorting a call option.
2. If the option is exercised and you do not own the stock then you will go "short" the stock, which will be delivered to the buyer of the option.
You broker will have to "borrow" stock in order to deliver it to the option buyer and you will pay a stock borrow rate for this service until you buy the stock to cover your short position.
Tan October 13th, 2012 at 1:51pm
Hi Peter, need your advise in this. Let say:
JPM now is 41.50
I intend to sell a call option at 0.60 with strike price 41.50
At option expiry JPM is 42.00
Question:
1. Do i need to own JPM before i can sell a call option?
2. If i sell a call option at 0.60 and the option was exercised, what will be the implications
Thank you.
Prerana July 30th, 2012 at 1:50am
I have read all the comments and its clear to me now....
Peter May 14th, 2012 at 11:54pm
Yes, your expression is correct. The "moneyness" terms are not dependent on long/short. If the option is out of the money at expiration then it is worthless, whether you're the buyer or the seller. If you're the seller then you have received money for something initially that is now worth zero, so you have profited from the transaction.
Mike May 14th, 2012 at 12:25pm
do the terms ITM, ATM & OTM always refer to the Buyer of an option? To make myself more clear... if I am selling a Call option with a strike of 100 and the current price of the underlying asset trades at 110... do we say that "I am writing a deep ITM Call option" Would this expression be correct?
Peter July 14th, 2011 at 6:00pm
Oh man, I apologize for that! You're right, if you stay in the trade and the stock stays there you will collect the premium of $8 per contract. If the market goes down then you will lose money. You will start losing money if the stock starts going below $127.
Selling the 125's will gain you an extra $1 per contract net but without the downside protection.
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