Question About - In the Money, Out of the Money, At the Money

C

clevertechie

Hi everybody,

I'm new to options trading, I just started learning about it a week ago.

Could someone please explain in what scenario the ITM, OTM, ATM actually takes effect?

What I mean is....

If SPY is currently trading at 179 and I buy 1 contract CALL at 185 strike for $1.79 - this option would be out of the money, yet from what I understand the options profit is made when the price of the actual contract goes up.

So, say SPY went to 182 (+3) and the price of the contract went up to $4.79 (+3) (assuming delta is 1) and I close the option - $4.79 - $1.79 = $3.79 * 100 = $370 profit.

Is this correct? So even though the option is still considered out of the money at 182 compared to where I bought it for 185.

If this is correct then the term out of the money is confusing to me...Does this only apply when the option is exercised or am I completely misunderstanding it?

Please help.

Thank you!
 
You got it.

However your option value will decay to 0, if you held that option to expiration. There is almost no reason to exercise if the option is OTM or lacking in intrinsic value.

Based on what you know about ITM, OTM and ATM. Determine what is

1) extrinsic value
2) intrinsic value

for each level of "moneyness"

Next step,

Understand the determinants of an options value : moneyness, time to expiration and volatility etc as expressed by Options greeks.
 
Quote from clevertechie:
----ITM, OTM, ATM actually takes effect?
----SPY is currently trading at 179....
----buy 1 contract CALL at 185 strike for $1.79....
----option would be out of the money....
----from what I understand the options profit is made when the price of the actual contract goes up.
----say SPY went to 182 (+3) and the price of the contract went up to $4.79 (+3) (assuming delta is 1) and I close the option - $4.79 - $1.79 = $3.79 * 100 = $370 profit.
----Is this correct?
----option is still considered out of the money at 182 compared to (the 185 strike price)....
----out of the money is confusing to me....
----am I completely misunderstanding it?
More...
1) You're misunderstanding it. As long as the market price is below the call-option strike price, that option is said to be "out of the money". :D
2) The delta of that option, when it's out-of-the-money, will never be 1. :(
3) With out-of-the-money options, you need greater and quicker willingness to close out positions before time decay overwhelms the position. :)
4) Keep doing more booklearning before trading. :cool:
 
Here is a link that will help you understand a lot about how options work:

https://www.thinkorswim.com/tos/displayPage.tos?webpage=trainingProducts

If you read and understand most of what is presented at that url you will have a good base knowledge of how options work and then you can get additional help from some people here.

The most important thing for a beginning options trader to understand is that you can lose way more than you ever imagined very quickly trading options. Start very very small.

Quote from clevertechie:

Hi everybody,

I'm new to options trading, I just started learning about it a week ago.

Could someone please explain in what scenario the ITM, OTM, ATM actually takes effect?

What I mean is....

If SPY is currently trading at 179 and I buy 1 contract CALL at 185 strike for $1.79 - this option would be out of the money, yet from what I understand the options profit is made when the price of the actual contract goes up.

So, say SPY went to 182 (+3) and the price of the contract went up to $4.79 (+3) (assuming delta is 1) and I close the option - $4.79 - $1.79 = $3.79 * 100 = $370 profit.

Is this correct? So even though the option is still considered out of the money at 182 compared to where I bought it for 185.

If this is correct then the term out of the money is confusing to me...Does this only apply when the option is exercised or am I completely misunderstanding it?

Please help.

Thank you!
More...
 
1) You're misunderstanding it. As long as the market price is below the call-option strike price, that option is said to be "out of the money".
2) The delta of that option, when it's out-of-the-money, will never be 1.
3) With out-of-the-money options, you need greater and quicker willingness to close out positions before time decay overwhelms the position.
4) Keep doing more booklearning before trading.
More...

1) That's exactly what I presented in the example, but just because the option is out of the money doesn't mean its not profitable.
2) It was a hypothetical example, delta 1 used for simplicity

You haven't answered my question.
 
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