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Options Trading Terms - AxisDirect
AxisDirect-O-Nomics
Feb 15, 2018 | Source: Investopedia
Options Trading Terminology
In options trading, the difference between "in the money" and "out of the money" is a matter of the strike price's position relative to the market value of the underlying stock, called its money-ness. An in the money option is one with a strike price that has already been surpassed by the current stock price, meaning the option holder is more likely to turn a profit. An out of the money option is one that has a strike price that the underlying security has yet to reach, meaning the option has little intrinsic value and is likely to yield only marginal returns, if any.
The definition of "in the money" or "out of the money" for a given option chain is dictated by the option type in question. A call option is an investment chosen by those who believe the underlying stock price will continue to rise. An in the money call option, therefore, is one that has a strike price lower than the current stock price. A call option with a strike price of $133, for example, would be considered in the money if the underlying stock is valued at $135 per share because the strike price has already been exceeded, making the option more valuable. A call option with a strike price above $135 would be considered out of the money because the stock has not yet reached this level.
Put options are purchased by investors who believe the stock price will go down. In the money put options, therefore, are those that have strike prices above the current stock price. A put option with a strike price of $75 is considered in the money if the underlying stock is valued at $72 because the stock price has already moved below the anticipated level. A put option with a strike price of $70 would be considered out of the money.
Typically, in the money options carry a higher premium than out of the money options, as they are more likely to yield a profit in derivatives trading.
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