Skip to main content

In the Money & Out of the Money Options



In options trading, moneyness is the relationship of the current price of the underlying asset to the strike price of a call or put option contract written on that asset. 

With options trading, the difference between ‘in the money’ and ‘out of the money’ is entirely based on the relationship between the strike price to the current market price of the underlying stock, bond, or commodity, and the magnitude of this position is known as moneyness.

There are three types of classifications for the moneyness of an option contract:

An option is ‘in the money’ if the contract would have intrinsic value if it were exercised today. 

An option is ‘out of the money’ if the contract would have zero intrinsic value if it were exercised today. 

An option is said to be ‘at the money’ if the current strike price is exactly the same as the current market price.  

A call option is in the money if the strike price is more than the current price of the asset it is written on. A put option is in the money if the strike price is less than the current price of the asset it is written on. The reverse is true for an out of the money option. Intrinsic value is measured by how deep in the money an option is. 

The amount of the move an option captures starts at 50% for an at the money option when the strike price and the asset price are equal in value and expands as an option goes deeper in the money and declines as an option goes farther away from the strike price. This is known as Options Delta.

Since in the money options have some level of  intrinsic value they are priced higher than out of the money options in the same option chain as their Delta is higher and captures more of the move in the underlying asset. In the money options have a higher probability of expiring in the money and capturing intrinsic value but the out of the money options have a higher gain in percentage if they start moving closer to being at the money as the Gamma increases pricing in the growing chance of them expiring in the money.

Many times you will see options abbreviated as ITM, OTM, or ATM designating their relationship to their current strike price. 

stockmarketadvisory.in

Comments

Popular posts from this blog

BJP Falls short of Majority (5th June 2024)

1.U.S Markets closed higher Yesterday  2. U.S Futures are trading higher now. 3. Asian markets are higher. 4. Global cues are positive currently. 5. U.S Markets have made a short term bottom and now have reversed. 6. Gift Nifty is up more than 100 Points. 7. Yesterday was a big surprise to everyone. 8. Contrary to the exit Poll , things have been changed dramatically.  9. Exit Polls indicated a cakewalk win for the BJP. 10. Reality of the Ground level was entirely different. 11. There is BJP Govt forming but with a Coilition Govt. 12. Coilition Govt changes many aspects. 13. Firstly , the Govt cannot take decisions on its own. 14. It has to get approval of other parties as well. 15. This would hamper the growth prospects and future plans. 16. Last 10 years , the Government had come with a simple majority. 17. They worked freely. 18. This is a way good for democracy 19. One Govt dominating is not good for the Country , now everyone has to work for welfare of Country. 20. Com

U.S Markets firing 🔥 (8th Feb 2024)

1. U.S Markets closed higher Yesterday. 2. U.S Markets are trading at their all time high on daily basis. 3. S&P 500 is now at 5k. 4. This has been a stellar show across the globe. 5. We have an Election Year in the U.S as well. 6. As you might not be aware more than 45% U.S citizens invest in stock market. 7. So for the Government to have a good impression and to gain vote Bank stock market have to be kept higher. 8. Government and FED will do what all they can to keep pro markets  9. Bank Nifty showed signs of comeback yesterday but the rally failed again. 10. Largecap stocks continue to underperform whereas Mid & Small caps continue to soar new highs. 11. Once a trend develops in the markets it can go on for a long time than expected. 12. Interestingly , I was doing some number crunching yesterday and found that small & mid cap companies have given better than expected results than large caps. 13. Most of the large caps have disappointed. 14. Star of the pack

Consolidation (2nd August 2023)

1. U.S Markets closed mixed Yesterday.  2. Dow Jones closed mildly in Green. 3. Rest of the indices closed lower. 4. Right now , Dow Futures is lower. 5. Gift Nifty is down 40-50 Points. 6. Asian markets are mostly lower as well. 7. It's a sort of Consolidation going on in the markets. 8. Markets are trading flat in between 19600 to 19800. 9. Within this range , Nifty is swinging like a pendulum. 10. Bank Nifty range is 45300 to 45800. 11. Both the Indices are moving at tandem. 12. Yesterday's expiry was quite flat. 13. FIN Nifty traded flat for whole of the expiry. 14. All option buyers in FIN Nifty lost huge. 15. Markets are likely to consolidate for few more sessions. 16. 19600 is the buying zone. 17. 19800 is the selling zone. 18. Unless we don't get any signs of range breakout we won't have to take one side view  19. Nifty might trade between 19600 to 19800 today. 20. Post this fed rate hike markets have become dizzy. 21.  stockmarketadvisory.in