Что такое In the Money и Out the Money

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In the Money vs. Out of the Money: What’s the Difference?

In the Money vs. Out of the Money: An Overview

In options trading, the difference between «in the money» (ITM) and «out of the money» (OTM) is a matter of the strike price’s position relative to the market value of the underlying stock, called its moneyness.

An ITM option is one with a strike price that has already been surpassed by the current stock price. An OTM option is one that has a strike price that the underlying security has yet to reach, meaning the option has no intrinsic value.

In the Money

ITM options also have their uses. For example, a trader may want to hedge or partially hedge their position. They may also want to buy an option that has some intrinsic value, and not just time value. Because ITM options have intrinsic value and are priced higher than OTM options in the same chain, the price moves (%) are relatively smaller. That is not to say ITM option won’t have large price moves, they can and do, but, compared to OTM options, the percentage moves are smaller.

Certain strategies call for ITM options, while others call for OTM options, and sometimes both. One is not better than another; it just comes down to what works for the best for the strategy in question.

A call option gives the option buyer the right to buy shares at the strike price if it is beneficial to do so. 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 $132.50, for example, would be considered ITM if the underlying stock is valued at $135 per share because the strike price has already been exceeded. A call option with a strike price above $135 would be considered OTM because the stock has not yet reached this level.

In the case of the stock trading at $135, and the option strike of $132.50, the option would have $2.50 worth of intrinsic value, but the option may cost $5 to buy. It costs $5 because there is $2.50 of intrinsic value and the rest of the option cost, called the premium, is composed of time value. You pay more for time value the further the option is from expiry because the underlying stock price will move before expiry, which provides an opportunity to the option buyer and risk to the option writer which they need to be compensated for.

Put options are purchased by traders who believe the stock price will go down. ITM 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 strike. That same put option would be out of the money if the underlying stock is trading at $80.

In the money options carry a higher premium than out of the money options, because of the time value issue discussed above.

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Out of the Money

In the money or out of the money options both have their pros and cons. One is not better than the other. Rather, the various strike prices in an options chain accommodate all types of traders and option strategies.

When it comes to buying options that are ITM or OTM, the choice depends on your outlook for the underlying security, financial situation, and what you are trying to achieve.

OTM options are less expensive than ITM options, which in turn makes them more desirable to traders with little capital. Although, trading on a shoe-string budget is not advised. Some of the uses for OTM options include buying the options if you expect a big move in the stock. Since OTM options have a lower up-front cost (no intrinsic value) than ITM options, buying an OTM option is a reasonable choice. If a stock currently trades at $100, you can buy an OTM call option with a strike of $102.50 if they think the stock will reasonably rise well above $102.50.

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OTM options often experience larger percent gains/losses than ITM options. Since the OTM options have a lower price, a small change in their price can translate into large percent returns and volatility. For example, it is not uncommon to see the price of an OTM call option bounce from $0.10 to $0.15 during a single trading day, which is equivalent to a 50 percent price change. The flip side is that these options can move against you very quickly as well, though the risk is limited to the amount paid for the option (assuming you are the option buyer and not the option writer).

Out Of The Money (OTM)

What Is Out Of the Money (OTM)?

Out of the money (OTM) is a term used to describe an option contract that only contains intrinsic value. These options will have a delta less than 50.0.

An OTM call option will have a strike price that is higher than the market price of the underlying asset. Alternatively an OTM put option has a strike price that is lower than the market price of the underlying asset.

OTM options may be contrasted with in the money (ITM) options.

Key Takeaways

  • Out of the money means an option has no intrinsic value, only extrinsic value.
  • A call option is OTM if the underlying’s price is below the strike price. A put option is OTM if the underlying’s price is above the strike price.
  • An option can also be in the money or at the money.
  • OTM options are less expensive than ITM or ATM options. This is because ITM options have intrinsic value, and ATM options are very close to having intrinsic value.

Understanding Out Of The Money Options

Option Basics

For a premium, stock options give the purchaser the right, but not the obligation, to buy or sell the underlying stock at an agreed-upon price, known as the strike price, before an agreed-upon date, known as the expiration date.

An option to buy an underlying asset is a call option, while an option to sell an underlying asset is a put option. A trader may purchase a call option if they expect the underlying asset’s price to exceed the strike price before the expiration date. Conversely, a put option enables the trader to profit on a decline in the asset’s price. Because they derive their value from that of an underlying security, options are derivatives.

An option can be OTM, ITM or at the money (ATM). An ATM option is one where the strike price and price of the underlying are equal.

Out of the Money Options

You can tell if an option is OTM by determining where the current price of the underlying is in relation to the strike price of that option. For a call option, if the underlying price is below the strike price, that option is OTM. For a put option, if the underlying’s price is above the strike price, then that option is OTM. An out of the money option has no intrinsic value, but only possesses extrinsic or time value.

Being out of the money doesn’t mean a trader can’t make a profit on that option. Each option has a cost, called the premium. A trader could have bought a far out of the money option, but now that option is moving closer to being in the money (ITM). That option could end up being worth more than the trader paid for the option, even though it is currently out of the money. At expiry, though, an option is worthless if it is OTM. Therefore, if an option is OTM, the trader will need to sell it prior to expiry in order to recoup any extrinsic value that is possibly remaining.

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Consider a stock that is trading at $10. For such a stock, call options with strike prices above $10 would be OTM calls, while put options with strike prices below $10 would be OTM puts.

OTM options are not worth exercising, because the current market is offering a trade level more appealing than the option’s strike price.

Out of the Money Options Example

A trader wants to buy a call option on Vodafone stock. They choose a call option with a $20 strike price. The option expires in five months and costs $0.50. This gives them the right to buy 100 shares of the stock before the option expires. The total cost of the option is $50 (100 shares * $0.50), plus a trade commission. The stock is currently trading at $18.50.

Upon buying the option, there is no reason to exercise it because by exercising the option they have to pay $20 for the stock, when they can currently buy it at a market price of $18.50.

This option is OTM, but that doesn’t mean it is worthless yet. The trader just paid $0.50 for the potential that the stock will appreciate above $20 within the next five months.

If the option is OTM at expiry it is worthless, but prior to expiry, that option will still have some extrinsic value which is reflected in the premium or cost of the option. The price of the underlying may never reach $20, but the premium of the option may increase to $0.75 or $1 if it gets close. Therefore, the trader could still reap a profit on the out of the month option itself by selling it at a higher premium than they paid for it.

If the stock price moves to $22—the option is now ITM—it is worth exercising the option. The option gives them the right to buy at $20, and the current market price is $22. The difference between the strike price and the current market price is known as intrinsic value, which is $2.

In this case, our trader ends up with a net profit or benefit. They paid $0.50 for the option and that option is now worth $2. They net $1.50 in profit or advantage.

But what if the stock only rallied to $20.25 when the option expired? In this case, the option is still ITM, but the trader actually lost money. They paid $0.50 for the option, but the option only has $0.25 of value now, resulting in a loss of $0.25 ($0.50 — $0.25).

In the Money and Out of the Money Options and Their Intrinsic Value

An option contract’s value fluctuates based on the price of the asset underlying it, such as a stock, exchange-traded fund, or futures contract. The option can be in the money (ITM), out of the money (OTM), or at the money (ATM). Each one of these situations affects the intrinsic value of the option.

The amount of time remaining before the option contract expires also plays a role in the value of the option, which in turn affects how high or low a price—the premium—the buyer is willing to pay for the option.

In the Money

If an option contract is ITM, it has intrinsic value. A call option—which gives the buyer the right but not the obligation to purchase an asset at a set price on or before a particular day—is in the money if the current price of the underlying asset is higher than that agreed-upon price, which is known as a strike price. The buyer could exercise their right under the option contract and buy the underlying asset for less than its current value. That means the call has intrinsic value.

Conversely, a put option—which gives the buyer the right to sell an asset at a set price on or before a particular day—is ITM if the price of the underlying security is lower than the strike price. The buyer could exercise their right under the option contract and sell the underlying asset for more than its current value. That means the put has intrinsic value.

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In summary, a call option is a bet that the underlying asset will rise in price sometime before or on a particular day—known as the expiration date—while a put option is a wager that the underlying asset’s price will fall during that time period.

If the strike price of a call option is $5 and the underlying stock is currently trading at $6, the option is ITM. The higher above $5 the price goes, the more ITM the option is and the greater it’s intrinsic value.

If the strike price of a put option is $5 and the underlying stock is currently trading at $4, the option is ITM. The lower below $5 the price goes, the more ITM the option is and the greater it’s intrinsic value.

The intrinsic value of an option that’s ITM is the greater of the strike price or the price of the underlying asset minus the other price. Therefore, the intrinsic value for both the call and put options with the strike price of $5 is $1.

Out of the Money

If an option contract is OTM, it doesn’t have intrinsic value. A call option is OTM if the current price of the underlying asset is lower than the strike price. The buyer of the call option would not exercise their right under the option contract to buy the underlying asset because they would be paying more than its current value.

Conversely, a put option is OTM if the current price of the underlying security is higher than the strike price. The buyer of the put option would not exercise their right under the option contract to sell the underlying asset because they would be receiving less than its current value.

If the strike price of a call option is $5 and the underlying stock is currently trading at $4, the option is OTM. The lower below $5 the price goes, the more OTM the option is.

If the strike price of a put option is $5 and the underlying stock is currently trading at $6, the option is OTM. The higher above $5, the more OTM the option is.

Because these OTM put and call options can not be exercised for a profit, their intrinsic value is zero.

At the Money

If an option contract’s strike price is the same as the price of the underlying asset, the option is ATM. If the strike price of a call or put option is $5 and the underlying stock is currently trading at $5, the option is ATM. Because ATM put and call options can not be exercised for a profit, their intrinsic value is also zero.

Time Value

The value of an option consists of both intrinsic value and time value. The greater the amount of time until an option expires, the more time value it has. That’s because there is a greater chance the option will, at some point, become ITM over the longer time frame before expiration and so have intrinsic value.

When deciding how much of a premium they’re willing to pay, a prospective option buyer must take into consideration whether the underlying asset has or is likely to have intrinsic value and the option’s time value. An option can be OTM and consequently have no intrinsic value but still have time value up until its expiration. If an ITM option has $10 of intrinsic value, the premium should be higher than $10 because of the time value inherent in the amount of time the underlying asset has to become even more ITM.

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