John Jagerson

Strike the Right Position

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Free Trading Guides

Options are classified as either "in the money," "at the money" or "out of the money." Each of these phrases has a distinct meaning and each option strike price will fall into one of the three categories.

If you will keep in mind that options convey rights to the buyer -- the differences between the three types will be easier to understand.

Let's quickly review the rights for each option.

Puts

Buying a put gives you the right to sell the stock for the strike price anytime before expiration.

Calls

A call gives you the right to buy the stock for the strike price anytime before expiration.

At the money

There is typically only one strike price that is considered "at the money." That strike price is the one closest to the current stock price. In the chain sheet below, the at-the-money strike price is $550. That is because the current price of the stock is $550.80 per share. There is no other strike price closer to current price of the stock.

Options Chain Sheet

In the money

The "in the money" strike prices are those with "intrinsic value." Intrinsic value means that the right conveyed by the option is worth something.

For example, if you owned the 530 strike call above, you have the right to buy the stock for $530 a share. Because the current price of the stock is $550.80, the option has intrinsic value of $20.80 per share. Similarly the 540 put strike price has intrinsic value of $10.80 per share because that strike price is $10.80 below the current stock price.

Be sure to notice that the in-the-money option costs more than its intrinsic value. For example, the ask price for the 540 strike price is $29.60. The difference between the option's price of $29.60 per share and its intrinsic value of $10.80 is $18.80. That excess amount is time value or "premium" and is something we will be discussing later in the course.