Options Greeks

Options Moneyness

Name: Options Moneyness - Menthor Q
Uploaded: 2024-06-17T19:53:36+00:00
Description: In this lesson, you will learn about the concept of Option Moneyness and the difference between options. There are three types of options based on

In this lesson, you will learn about the concept of Option Moneyness and the difference between options. There are three types of options based on Moneyness:

ATM (At the Money): The term stands for At The Money and is used when the strike price is equal to the underlying stock price. When an option expires ATM (At the Money), its exercise is not automatic but only occurs upon written request by the holder, depending on convenience. The holder of such an option at expiration is in a position of indifference.
ITM (In the Money): The term stands for In The Money and is used to indicate when the strike price is “inside” the underlying stock price. The value of an ITM option is defined differently between CALL and PUT options.
- For CALL options, the strike is ITM if it is lower than the underlying price. For example, if a stock is currently trading at $50, an ITM CALL option on it would have a strike price of, for example, $49, $48, $47, and lower.
- For PUT options, the strike is ITM when it is higher than the current price of the underlying stock. So, for example, if we wanted to buy an ITM PUT option on a stock trading at $50, the strike price should be, for example, $52, $53, $54, and higher.
- When an option expires ITM (In the Money), its exercise is automatic.
OTM (Out of the Money): OTM is the acronym for “Out of The Money” and is used to indicate that the option’s strike is “outside” the underlying stock price.
- For CALL options, the strike is OTM if it exceeds the stock price. So, if we wanted to sell an OTM CALL option on a stock currently trading at $50, the option’s strike should be above $50, for example, $51, $54, etc.
- For PUT options, the strike is OTM when it is lower than the current price of the underlying stock. So, if we wanted to buy an OTM PUT option on a stock trading at $50, the strike price should be below $50, for example, $49, $44, etc.
- When an option expires OTM (Out of the Money), it is not exercised. Expired OTM options are practically worthless at expiration, and exercising them is not beneficial.