Option Strike Price
by S. S
New. Having a hard time here understanding option strike price and hope for a good explanation.
If stock XYZ is trading at $50 and you want to buy a call contract. Why would the strike prices UNDER $50 be consider as In The Money?
So what would be the difference in the two examples below?
The stock XYZ is currently trading at $50. You buy 1 call option at the Strike Price of $45. At expiration, the stock is trading at $60.
The stock XYZ is currently trading at $50. You buy 1 call option at the Strike Price of $55. At expiration, the stock is trading at $60.
Thanks for the help.
Comment on "Option Strike Price
TSO Reply: Hi S.S. From what I gathered, you seem to be confused over the relationship between stock price, option strike price and the various terms that explain this relationship.
As a recap, a call option is consider to be In The Money when the option strike price is LOWER then the underlying stock price.
Therefore if the stock XYZ is trading at $50 per share in January, the XYZ February $47.50 call, XYZ June $45 call or XYZ October $35 call strike price are consider to be ”In The Money” call option.
However, the XYZ January $55 call option is “Out of the Money”, just like the XYZ February $60 call and XYZ May $70 call.
The opposite is true for Put option. This mean that a Put Option is consider to be In The Money when the option strike price is HIGHER then the underlying stock price.
In the two examples that you have given, the difference is only on “timing” of looking at the call options.
In Example A, the XYZ $45 call option is consider as In The Money for both the dates when the option is traded and on expiration date.
For Example B, the $55 call option is consider as Out of The Money on the date the option is traded. If you are to exercise the $55 call option on the trade date, this mean that you are willing to pay $55 a share for XYZ while the market price only cost $50 a share. This is not sensible.
At expiration, XYZ is trading at $60 a share. Therefore, the XYZ $55 call option is consider to be In The Money at expiration date. In actual fact, once the stock price of XYZ cross $55.01, the XYZ $55 call options is treated as In The Money by definition.
The term In The Money has different meaning for both Call and Put options. Once you are able to understand the differences, then you are able to apply the appropriate Option Strategies in the different market conditions.
Have many profitable trades ahead!