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

 

Need Help Passing Your Series 4 Exam?

Intrinsic Value And Time Value

Related Articles
  1. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  2. Trading

    What Is Option Moneyness?

    In the money, at the money and out of the money define the current profitability of options positions.
  3. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  4. Trading

    A Newbie's Guide to Reading an Options Chain

    Learning to understand the language of options chains will help you become a more effective options trader.
  5. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  6. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  7. Trading

    The Basics Of Option Price

    Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options.
  8. Trading

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  9. Trading

    Understanding The Options Premium

    The price of an option, otherwise known as the premium, has two basic components: intrinsic value and time value.
Frequently Asked Questions
  1. How Do Economic Value Added and Accounting Profit Differ?

    Learn the differences between economic value added (EVA) and accounting profit. Understand how both measure profit and net ...
  2. What Does a High Capital Adequacy Ratio Indicate?

    Learn about the capital adequacy ratio, what the ratio measures, how it is calculated and what it means when a bank has a ...
  3. How Is Equity and Shareholders' Equity Different?

    A company's equity typically refers to the ownership of a public company. Shareholders' equity is the difference between ...
  4. How do you calculate a company's equity?

    Company equity, or shareholders' equity, is the net difference between a company's total assets and total liabilities.
Trading Center