Options: Characteristics of Options
Options can have three types of characteristics
and they are:
In the
money - You are in the money when you own an option with a strike
price that's close enough to the current market price to allow you to
exercise the option at a profit. If it's a put option, giving you the
right to sell, the current market price must be below the strike price. If
it's a call option, giving you the right to buy, the current price must be
above the strike price. For example, if you have a call option with a
strike price of $40, and the current market price of the stock is $50,
you're in the money, since you could buy the stock at $50 and sell it at
$52. In-the-money options are generally among the most actively traded,
especially as the expiration date approaches. The amount by which an
option is in-the-money is referred to as intrinsic value. In
this example, intrinsic value would be $10 ($50-$40). A put option is
in-the-money when the share price is below the strike price. With put
option, current stock price need to be at $30 ($40-$30) to have the same
intrinsic value. Out of
the money - you are out of the money when the market price of an
instrument on which you hold an option is not close to the strike price.
In the case of call options — which you buy when you think the price is
going up — you're out of the money when the price is below the strike
price. And in the case of put options — which you buy when you think the
price of the underlying instrument is going down — you're out of the money
when the price is higher than the strike price. For example, a call option
on a stock with a strike price of $50 would be out of the money if the
current market price were $40. And a put option on the same stock would be
out of the money if its market price were $60. When an option is out of
the money, you don't exercise it, but let it expire.
At the money - At the money
is another way of saying at the current price. Options whose exercise
price is the same or almost the same as the current market price of the
underlying stock or futures contract are considered at the money. For
example, in either call or put option you would have a strike price of $50
and current market price of $50.
Options can also be broken down into two categories: American and
European. American options can be exercised at any time
between the date of purchase and the expiration date. Most exchange-traded
options are of this type. European options are different
from American options in that they can only be exercised at the end of
their life.
| Equity call
option: |
| In-the-money = strike price less
than stock price |
| At-the-money = strike price same
as stock price |
| Out-of-the-money = strike price
greater than stock price |
| Equity put option: |
| In-the-money = strike price
greater than stock price |
| At-the-money = strike price same
as stock price |
| Out-of-the-money = strike price
less than stock price |
Next-->>
How
Options Work
Too much money is as demoralizing as too
little,
and there's no such thing as exactly
enough.
-- Mignon McLaughlin, The Second Neurotic's Notebook, 1966 --
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