4.1.5. Calculating Gains and Losses
A call option is in the money, when the market price exceeds the strike price, regardless of whether the call option is long or short. An option will be exercised whenever it is in the money by at least $0.01 at the expiration date. When the option is equal to the strike price, the call is said to be at the money, and when the market price is below the strike price, the call is out of the money. Calls that are out of the money will not be exercised.
Example: Sarah has written the following option: Jul Corn 420’2 Call @ 3’0. When the market price is 420’4, the call option is in the money. At the expiration date, it will be exercised. If the market price is 420’2, the call is at the money. When the market price is below 420’2, the call is out of the money and will not be exercised.
The opposite is true for puts. A put option is in the money when the market price is below the strike price. A put option is out of the money when the market price exceeds the strike price.
An option that is in the money, whether it is a put or a call, is good for the holder of the option. As the option buyer, the holder has the right to exercise the option, which she will only do when the option is in the money.
|
In or Out of the Money |
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|
Option |
Strike < Market Price |
Strike > Market Price |
|
Calls |
in the money |
out of the money |
|
Puts |
out of the money |
in the money |
Note: Just because an option is in the money, that doesn’t mean the holder of the option will make a profit. For the holder to profit, the option must be in the money by more than the amount of the premium the holder paid. Being in the money only means that i