Make Profits Through ‘In The Money’
When the strike price of the call option is less than the price in the market of the underlying security or the put option’s strike price is more than the price in the market of the underlying security is known as “in the money”. It is said that if the option is in the money it has intrinsic value whereas if the option is out of the money will not have intrinsic value. If the trader is investing to trade in the money, it does not mean that they will make profits from the trade since to purchase an option it costs money. In the money will mean that the option can be exercised. All these options can be applied to crypto trading as well to know more go through this review.
If the stock option is worth exercising and has intrinsic value it means that it is in the money. Let us take an example:
Suppose a person by name Mathew purchases a call option on stock XYZ whose strike price is $15. Now the stock price is sitting at $20 in this case the option is said to be in the money because the option will offer Mathew the right to purchase the stock for $15 but he will be able to sell it instantly for $20 which will gain his profit of $5. Here every options contract will be representing 100 stocks, therefore, the profit that he will actually earn will be $5 x 100 which will be equal to $500.
In case Mathew would pay $5.50 for the call, there wouldn’t be any possible profits that he would gain from making this trade because he would pay $550 which is $5.50x 100 shares just to trade one contract which will lead to him benefiting only $500 so as you can see he is actually losing $50. However, in spite of this, here the option is considered as in the money since when the option expires it will be worth $5. If the strike price of the option would have been $21, in this case, it would be out of the money and hence they will not be of any worth when they expire meaning it does not have intrinsic value.
Out of the money in a brief
A call option is said to be out of money when its strike price is more than the market price of the underlying security or put option has a strike price that is lower than the underlying security’s market price. There is no intrinsic value in out of the money, however, it has extrinsic value or time value.