Options Study Lesson: In the Money & Out of the Money Options
Traders always ask me what's the difference between an in the money option and out of the money option?
In options trading, the difference between "in the money" and "out of the money" is a matter of the option strike price relative to the market value of the underlying stock.
An in the money option is one with a strike price that has already been surpassed by the current stock price. The premium is the most expensive here and has the most risk of being called away. Look at the following chart in relation to covered call writing.
An out of the money option is one that has a strike price that the underlying security has yet to reach. The premium is the least expensive here and has the least risk of being called away.
A call option is an investment chosen by those who believe the underlying stock price will continue to rise. An in the money call option, therefore, is one that has a strike price lower than the current stock price.
Put options are purchased by investors who believe the stock price will go down. Typically, in the money options carry a higher premium than out of the money options, as they are more likely to yield a profit.