Options 101
This topic covers the basis concepts of Options trading:
Call & Put Buying
As a Call option buyer, that gives you the right to buy an underlying asset or instrument at a set price (strike price), on or before a certain date (expiration date). For that right, you give the option writer (or seller) a premium. As a call buyer, you expect the underlying asset to raise past the strike price and the premium paid. Your maximum lost is the cost of the option with an unlimited upside potential.
As a Put option buyer, that gives you the right to sell an underlying asset at the strike price on or before the expiration date. For that right, you give the option writer (or seller) a premium.
ITM, ATM, OTM
ITM: In the money
Strike < Asset price
Strike > Asset price
ATM: At the money
Strike = Asset price
Strike = Asset price
OTM: Out of the money
Strike > Asset price
Strike < Asset price
Moneyness is the intrinsic value of an option at any point in time, relative to the price of the underlying asset. For Up/Down options, the moneyness at settlement is the important factor for determining option payouts.
Only ITM options have a positive intrinsic value at settlement, so only ITM options are exercised for profit gains.
Last updated