Options Strategies

Definitions: Options

"In-the-money", "On-the-money", "Outside-the-money or "Out-of-the-money"

We are able to define three situations which can apply to options, being:

  1. "In-the–money" – A situation where it is worthwhile exercising the option.
  2. "Out-of-the-money – A situation where it isn't worthwhile exercising the option.
  3. "On-the-money" – A situation where for all practical purposes it is not worthwhile exercising the option.

 The following table shows us when a Call option is in each of these situations and when a Put option is in each of these situations:



Definitions

Call Options

Put Options

1.   Option in-the-money

Where the strike price is lower than the DJ Index

Where the strike price is higher than the DJ Index

2.   Option on-the-money

Where the strike price equals the DJ Index

Where the strike price equals the DJ Index

3.   Option outside-the- money

Where the strike price is higher than the DJ Index

Where the strike price is lower than the DJ Index

The following Schedule demonstrates the statements contained in the Table.

The following Schedule demonstrates the statements contained in the Table.

The situation of the option is of particular importance at the exercise date.

When the option is in-the-money it is worth exercising it.

When the option is outside-the-money, it is not worth exercising it.

When the option is on-the-money, it is also not worth exercising it (the option is worth 0).

 

Definitions: Options566  Definitions: Options