Understanding Trading Concepts Part V: In the money, at the money and out of the money options.

In continuation to Part IV of this series of articles, we present in this section various types of options.

Suppose the share of a company X is trading at 100 bucks. This price is called ‘spot price’ of the share. The share can have any number of Call and Put options. Suppose the stock has the following options.

Call 75, Call 80, Call 90, Call 95, Call100, Call 105, Call 110, Call 115, Call 120

and

Put 75, Put 80, Put 85, Put 90, Put 95, Put 100, Put105, Put110, Put115, Put120.

The number 75, 80, … , 115, 120 suffixed to the options are called ‘Strike prices’ of the options.

In the money options 

If the strike price of a Call Option is less then the spot price of the underlying stock than the Call Option is called in the money. For example Call 75, Call 80, Call 90 and Call 95 are called in the money Calls.

But in case of Put Option, if the strike price of the put is more than the spot price of the underlying stock, then the Put Option is called in the money. For example, Put105, Put110, Put115 and Put120 are called in the money Puts.

At the money options

A Call or a Put is called at the money when strike price of the option is equal to the spot price of the underlying stock. Examples are Call 100 and Put 100.

Out of the money options

A call is called out of the money when its strike price is more than the spot price of the underlying stock. Examples are Call 105, Call 110, Call 115 and Call 120.

Likewise, a Put is called out of the money when its strike price is less than the spot price of the underlying stock. Put 75, Put 80, Put 85, Put 90 and Put 95 are examples of out of the money Put options.

We hope that the readers of this series of articles are becoming well versed with the terminology involved. In our next article we will state how options are helpful in hedging one’s investments.