5.1.5. 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. 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.
|
You’re In or Out of the Money |
||
|
Option |
Strike < Market Price |
Strike > Market Price |
|
CALLS |
in the money |
out of the money |
|
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 easiest way