In the Money, At the Money and Out of the money Options.
An option is said to be 'at-the-money', when the option's strike price is equal to the underlying asset price. This is true for both puts and calls.
A call option is said to be in-the-money when the strike price of the option is less than the underlying asset price. For example, a Nifty call option with strike of 5400 is 'in-the-money', when the spot Nifty is at 5600 as the call option has value.
The call holder has the right to buy a Nifty at 5400, no matter how much the spot market price has risen. And with the current price at 5600, a profit can be made by selling Nifty at this higher price.
On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price. Using the earlier example of Nifty call option, if the Nifty falls to 5200, the call option no longer has positive exercise value. The call holder will not exercise the option to buy Nifty at 5400 when the current price is at 5200.
A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. For example, a Nifty put at strike of 5600 is in-the-money when the Nifty is at 5400. When this is the case, the put option has value because the put holder can sell the Nifty at 5600, an amount greater than the current Nifty of 5400.
Likewise, a put option is out-of-the-money when the strike price is less than the spot price of underlying asset. In the above example, the buyer of Nifty put option won't exercise the option when the spot is at 5800. The put no longer has positive exercise value.
Options are said to be deep in-the-money (or deep out-of-the-money) if the exercise price is at significant variance with the underlying asset price.
An option is said to be 'at-the-money', when the option's strike price is equal to the underlying asset price. This is true for both puts and calls.
A call option is said to be in-the-money when the strike price of the option is less than the underlying asset price. For example, a Nifty call option with strike of 5400 is 'in-the-money', when the spot Nifty is at 5600 as the call option has value.
The call holder has the right to buy a Nifty at 5400, no matter how much the spot market price has risen. And with the current price at 5600, a profit can be made by selling Nifty at this higher price.
On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price. Using the earlier example of Nifty call option, if the Nifty falls to 5200, the call option no longer has positive exercise value. The call holder will not exercise the option to buy Nifty at 5400 when the current price is at 5200.
A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. For example, a Nifty put at strike of 5600 is in-the-money when the Nifty is at 5400. When this is the case, the put option has value because the put holder can sell the Nifty at 5600, an amount greater than the current Nifty of 5400.
Likewise, a put option is out-of-the-money when the strike price is less than the spot price of underlying asset. In the above example, the buyer of Nifty put option won't exercise the option when the spot is at 5800. The put no longer has positive exercise value.
Options are said to be deep in-the-money (or deep out-of-the-money) if the exercise price is at significant variance with the underlying asset price.
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