Option Premiums

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.

Series 9 Exam Guide

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

 

OPTION STRATEGIES

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

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  3. Trading

    The Basics of Options Profitability

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

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  5. Trading

    The importance of time value in options trading

    Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.
  6. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  7. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  8. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
Frequently Asked Questions
  1. Why is there a negative correlation between quantity demanded and price?

    Learn what the law of demand is, the basic assumption of the law of demand and why there is a negative correlation between ...
  2. If an IRA owner dies after starting required minimum distributions (RMD) but the spouse is under 70½, can the spouse roll over the IRA into his/her own IRA, and stop RMDs until age 70½?

    If the IRA owner dies after the required beginning date (RBD) and his/her beneficiary is his/her spouse, the spouse beneficiary ...
  3. How do credit bureaus make money?

    Take a closer look at how credit bureaus make money, and learn about the kind of services they provide to both lenders and ...
  4. I make over $120,000/yr and my adjusted gross income precludes standard IRA contributions. My contributions to my 401(k) plan at work are limited to $18,500/yr. It seems I'm being penalized for my income. Are there other retirement savings options av

    Only your eligibility to deduct contributions will be affected. You may still make a nondeductible contribution up to the ...
Trading Center