John Lansing

   

Call Options

• Buy a call option if you expect the stick to increase in value.
• The writer of the call option is obligated to sell the stock to you at the strike price.
• As the purchaser of the call option, you are not obligated to buy the stock.
• It may be more profitable to sell the option before its expiration date than to exercise the option.

Put Options

• Buy a put option if you expect the stock to decrease in value.
• The writer of the put option is obligated to buy the stock off you at the strike price.
• As the purchaser of the put option, you are not obligated to sell the stock.
• It may be more expensive to sell the option before expiration than to exercise the option.

At-the-Money

At-the-money (ATM) describes the rare circumstance in which the price of the underlying stock matches (or is within a few cents) of the strike price of the option you hold.

In-the-Money

Let's say XYZ stock is currently selling for $18.34 and the nearest strike prices are $17.50 and $20.

If we decide to buy a call option and choose the $17.50 strike price, our option is considered in-the-money.

This means that our option is already profitable. And by purchasing the option, we gained the right to buy the stock for $17.50 per share and can turn around and sell it for $18.34.

In-the-money options typically cost more to purchase, but can result in a higher delta.

Out-of-the-Money

Using our XYZ stock example trading at $18.34, if we were to buy the option with a $20 strike price, we are immediately in a loss position and have purchased an option considered out-of-the-money.

We have the right, but not the obligation, to buy the stock from an individual for $20 per share, but can only sell it for $18.34.

Since we are buying the option in a loss position, its value is considerably less than an ATM or ITM option. The delta is also considerably lower.

Ken Trester

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