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What are in the
money and
out of the money options?
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Learn an
important lesson of what it means for an option to be
"in the money" or "out of the money"
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In
and out of the money options are
determined by what is called the strike price.
If you buy a call
option at a strike price that is below the
actual market value of the commodity you are buying the
option on, it is said to be "In The Money"
because you are buying a contract that gives you
the right to purchase a commodity at a price that
is less than the market value.
If you buy a call
option at a strike price that is above the market
price of the actual commodity, it is said to be
"Out Of The Money" because you
are buying a contract that is above market value
and has no intrinsic value. The only worth
of the "out of the money" option is
called time value, because the
commodity still has time to rise above your
strike price.
The opposite is
true for a put option. With a put option,
you are hoping to sell something you own, or
borrow, and buy it back later at a lower price.
Then you collect the difference in cash.
An "In
The Money" put option actually has a
higher strike price than the current market value,
because you are selling something and could turn around and buy the
commodity back at a lower price.
An "Out
Of The Money" put option, actually has a
strike price that is lower than market value,
because you wouldn't want to buy something back at
a higher price (market value) than what you sold
it for.
The only value an "out of the money" put
option has is time value because you still
have time for the market price to drop to less
than your strike price.
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