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Puts, Calls and Moneyness - Options Mastery Series Lesson 28

Filed Under Options Mastery Series 

Puts, Calls and Moneyness
In his Options Mastery Course at Options University, Ron Ianieri uses the term “moneyness” to describe out-of, at-the and in-the-money conditions of a stock option.
 
In-the-Money
 
A put is in-the-money if the strike price is greater than the current stock price. For example, if a stock is trading at $50 and the strike price is $60, the put is in-the-money. Another way to remember when an option is in the money-be it a call or put- is when you imagine what would happen if you exercised  your position rights at the current price. In our example, if you were long a put and exercised, you would be able to get stock for the current $50 price and turn right around and sell the stock for the strike price of $60. You pocket the $10 per share difference less commissions.
 
Out-of-the-Money
 
If you buy a put, you are out-of-the-Money when the strike price is below the current price. For example, if you buy a put with a strike of $50 and the price is currently at $60 the stock must go below the strike price before it would be in-the-money. Imagine if you could exercise the $50 strike you would have the right to sell the stock for $50; why would you do that when the stock is at $60? So, because exercising the $50 strike put provides no benefit, the $50 put-in this case-is considered to be out-of-the-money because the strike price is less than the stock price. The stock price is the elevator and the strike is the floor. Before the door can open, the elevator must arrive at the floor. The analogy holds for calls, as well.
 
At-the-Money
 
The at-the-money put doesn’t mean that the put strike has to be exactly equal to the stock price. It doesn’t have to be equal; it just needs to be close. The at-the-money put is the put whose strike price is the closest to the current stock price.
 
In the Options Mastery Course, they give the example of looking at a $30 strike put when the stock is trading at $29. Even though the stock is a bit in-the-money, it is still considered at-the-money. Likewise, if the price were at $31, that would also be considered at-the-money. At-the-moneyis the put whose strike price is closest to the current stock price, not directly equal to it, just the closest. So, what that means is our at-the-money put might actually be slightly in-the-money or slightly out-of-the-money in real terms.
 
Another more subtle thing about being in-the-money has to do with having a “harder” Delta. This means that because an in-the-money put isn’t as susceptible to movements of time and volatility as the at-the-money put is, and probably not quite as much as the out-of-the-money put; we call the in-the-money put or call as having a “hard” Delta. The thing that‘s really driving that in-the-money put is the mostly just the stock price. When a call or put is deep in-the-money, Delta is close to 1.0 and the option moves in total sync with the stock price movement.
 
Not surprisingly, the out-of the money and the at-the-money puts and calls are called “soft” Delta. The values of these options are more susceptible to movements in volatility and time decay than movements in the stock.
 

To learn just about everything you need to know about stock options, find about the Options Mastery Course offered by the Options University at www.optionsuniversity.com

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