
The price of an option is known as its premium. Factors that determine the value of an option and, as a result, its premium, are:
 The Relationship of The Underlying Stock Price to The Option’s Strike Price
 The Amount of Time To Expiration
 The Volatility of The Underlying Stock
 Supply and Demand
 Interest Rates
An Option can be:
 In The Money
 At The Money
 Out of The Money
These terms describe the relationship of the underlying stock to the option’s strike price. These terms do not describe how profitable the position is.
In The Money Options
A call is in the money when the underlying stock price is greater than the call’s strike price.
Example:
An XYZ June 40 Call is $2 in the money when XYZ is at $42 per share.
A put is in the money when the underlying stock price is lower than the put’s strike price.
Example:
An ABC October 70 Put is $4 in the money when ABC is at $66 per share.
It would only make sense to exercise an option if it was in the money.
At The Money Options
Both puts and calls are at the money when the underlying stock price equals the options exercise price.
Example:
If FDR is trading at $60 per share, all of the FDR 60 calls and all of the FDR 60 puts will be at the money.
Out of The Money Options
A call is out of the money when the underlying stock price is lower than the option’s strike price.
Example:
An ABC November 25 call is out of the money when ABC is trading at $22 per share
A put option is out of the money when the underlying stock price is above the option’s strike price.
Example:
A KDC December 50 put is out of the money when KDC is trading at $54 per share.
It would not make sense to exercise an out of the money option.
Calls  Puts  
In the Money 
Stock Price > Strike Price 
Stock Price < Strike Price 
At The Money 
Stock Price = Strike Price 
Stock Price = Strike Price 
Out of The Money 
Stock Price < Strike Price 
Stock Price > Strike Price 
Series 4 textbooks  SecuritiesCE.com
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