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 September 2nd, 2018 at 7:44pm
Hi John,
Apologies, I am a little confused when you say that the stock is in-the-money but went the wrong direction. Is the put option in-the-money...so the stock price is below the strike price, or the other way around?
In any case, to buy a stock at a certain strike price you would need buy a call option and the exercise the call to take delivery of the stock. However, you would pay a price to do this, which would negate the lower price of the strike in the first place.
John August 29th, 2018 at 2:45pm
Peter, Thank you for answering questions
I bought a naked Put option, and the expiration date is near, the stock is 2.00 in the money, (went the wrong direction on this one) is there a way to execute and purchase the stock at the strike price and turn around and sell the stock?
Peter August 18th, 2018 at 11:20pm
Hi John,
If you short a call or put option, your broker doesn't borrow stock for you to cover those positions; that's why they are naked.
If you're short a call option and you're exercised, you will then have to deliver shares to the buyer. In this case, your broker borrows stock to deliver to the option buyer's broker for delivery and then assigns you a short position in the shares in your account. You will be short the shares until you buy to close.
When you are short a put and you are exercised, there is no borrowing at all because an exercised short put results in a long position in the shares.
John August 17th, 2018 at 1:14pm
Still do not completely understand short when selling Naked Calls and Puts as to replacing the stocks that were borrowed from the broker, if I sell to close, a naked put, do I need to replace the borrowed stocks by buying the amount of stocks that the option was short? Which would be 100 shares, I thought the underlining stock had to be sold by the owner of the stock. why would I have to provide stock to the broker if the stock was sold by the holder of the stock. On a Naked call, if I sell to close before the expiration date am I required to replace stocks that were short, because the call had no under lining stock in my account, I thought that sell to close, called the stock to be sold from the holder of the underlying stock? and I received the difference between the strike price and the last price?
Peter July 29th, 2018 at 2:19am
Hi John,
When you're long options (i.e. have bought) you always lose value as the expiration date approaches; you'll never gain any more time value by waiting. if you don't expect the stock to trade any higher, then selling to close was the right decision - nothing wrong with doubling your money!
John July 28th, 2018 at 3:37pm
I bought a call option the stock doubled the amount of the premium, I paid in 1 day, I had a 85 days until it expires, what benefit is there to wait until the expiration date is closer, is there any time value added when you wait, interest, or any added benefit, I don't know if that stock will tank tomorrow, looking at historical data the rally reached close to its yearly high, was overbought, so I took the profits and I did a: sell to close.
Peter June 10th, 2014 at 1:11am
Hi Ray,
I think it is possible - not easily, and not within a short amount of time...so I guess the answer is "no" for a novice ;-) but possible after learning what's needed and after researching and paper trading.
Ray June 9th, 2014 at 1:00pm
Can a novice investor really " make a "living " in the options market?
Peter March 31st, 2014 at 6:52pm
Hi Richard,
When you exercise an option you are assigned the value of the strike price - it can be the underlying stock itself or it may simply be a cash settlement amount.
The premium you pay as the buyer of the option is paid to the option seller at the time of the transaction; it isn't factored into the conversion of the option into stock/cash. The is the price you pay to have the "option" to exercise or not and for the seller represents an insurance premium of sorts to take on that risk.
The settlement method depends on the instrument and its specifications. Typically stocks are physically settled (you exercise into the shares) and indicies are cash settled.
Hope this helps - let me know if anything else is unclear.
Richard March 28th, 2014 at 9:58am
Question on exercise of european weeklies (SPXW)
Index: SPX
Type: European
Expiration: PM-settled
I know, theoretically, a call (or put) an be exercised at strike but how does it play out in reality with the factored in premium?
e.g. SPX call strike price of 1865. Premium is 3.40. Will the call be exercised at 1865 or 1868.40 (including the premium)? Basically, if the SPX is trading on expiration day around 1865, is it beneficial to sell the 1865 call if the market stays below 1868?
I think that the SPX weeklies have a different type of assignment than a typical stock, correct?
Thanks
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