Difference Between In-The-Money (ITM), Out-Of-The-Money (OTM) Or At-The-Money (ATM) In Stock Option Investing



Provided By Options University

There Is Much To Learn Before You Can Be Confident & Successful At Stock Option Investing

An option in stock option investing can be described by its strike price’s proximity to the stock’s price. An option in stock option investing can either be in-the-money (ITM), out-of-the-money (OTM), or at-the-money (ATM).

An at-the-money option in stock option investing is described as an option whose exercise or strike price is approximately equal to the present price of the underlying stock.

An example of stock option investing, if Microsoft (MSFT) was trading at $65.00, then the January $65.00 call would an example of an at-the-money call option. Similarly, the January $65.00 put would be an example of an at-the-money put option.

An in-the-money call option in stock option investing is described as a call whose strike (exercise) price is lower than the present price of the underlying. An in-the-money put is a put whose strike (exercise) price is higher than the present price of the underlying

In our stock option investing example above, an in-the-money call option would be any listed call option with a strike price below $65.00 (the price of the stock). So, the MSFT January 60 call option would be an example of an in-the-money call.

The reason is that while stock option investing, at any time prior to the expiration date, you could exercise the option and profit from the difference in value: in this case $5.00 ($65.00 stock price - $60.00 call option strike price = $5.00 of intrinsic value). In other words, the option is $5.00 “in-the-money.”

Using our stock option investing example, an in-the-money put option would be any listed put option with a strike price above $65.00 (the price of the stock). The MSFT January 70 put option would be a stock option investing example of an in-the-money put.

It is in-the-money because at any time prior to the expiration date, you could exercise the option and profit from the difference in value: in this case $5.00 ($70.00 put option strike price - $65.00 stock price = $5.00 of intrinsic value. In other words, the option is $5.00 “in-the-money.”

Please view charts below for more in-the-money stock option investing examples:



An out-of-the-money call when stock option investing is described as a call whose exercise price (strike price) is higher than the present price of the underlying. Thus, an out-of-the-money call option’s entire premium consists of only extrinsic value.

There is no intrinsic value in an out-of-the-money call when stock option investing, because the option’s strike price is higher than the current stock price. For example, if you chose to exercise the MSFT January 70 call while the stock was trading at $65.00, you would essentially be choosing to buy the stock for $70.00 when the stock is trading at $65.00 in the open market. This action would result in a $5.00 loss. Obviously, you wouldn’t do that while stock option investing.

An out-of-the-money put has an exercise price that is lower than the present price of the underlying. Thus, an out-of-the-money put option’s entire premium consists of only extrinsic value.

There is no intrinsic value in an out-of-the-money put because the option’s strike price is lower than the current stock price. For example, if you chose to exercise the MSFT January 60 put while the stock was trading at $65.00, you would be choosing to sell the stock at $60.00 when the stock is trading at $65.00 in the open market. This action would result in a $5.00 loss. Obviously, you would not want to do that when stock option investing.

Please view charts below for out-of-the-money stock option investing option examples:




Discover these secret option trading strategies that will have your friends calling YOU 'the options expert' Click here!


 
 
"You’re About To Learn Secrets Most Traders Will Never Know About Profitable System Trading..."

Inside you’ll learn...

  • How to design a winning system from scratch and exactly what to do to supercharge your current stock trading system!

  • The one ingredient you literally "Drop" into your stock trading system that can triple your profit!

  • How to use “secret” money management techniques to minimize your risk.

  • The tools the professionals use and how you can get huge discounts (charting software, data, etc).

  • And you'll also get a FREE copy of David Jenyns’ complete Ultimate Trading Systems Course…

    Just enter your name & email - then click the “Click Here For Free Instant Download!” button. (All information kept 100% confidential). The download details will be emailed to you immediately.




    :
    :




  • We take your privacy very seriously. My personal privacy guarantee to you. I respect your privacy and will never share your email address with anyone. You can easily unsubscribe at any time. View our Privacy Policy - David Jenyns Founder of www.ultimate-trading-systems.com

     

    copyright 2005 Stock Option Investing
    www.meta-formula.com