4.1.6. 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 $.01 at the expiration date. Equity options holders may also exercise in-the-money options before 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 call option, LNTR Jul 25 call @ 3. When the market price is $25.50, the call option is in-the-money. At the expiration date, it will be exercised. If the market price is 25, the call is at-the-money. When the market price is below 25, 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 she will profit by it, that is, when she is in-the-money.
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You’re In- or Out-of-the-Money |
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Option |
Strike < Market Price |
Strike > Market Price |
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CALLS |
In-the-money |
Out-of-the-money |
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PUTS |
Out-of-the-money |
In-the-money |
The exam may ask you calculate an investor’s gains or losses on an options transaction. The easi