This is another in our series called Options for Newbies. In this series, I’m explaining options from the ground up. Even if you’re a veteran, these articles may give you a deeper understanding of some aspects of options than you had before.
In options, there is an important concept called “moneyness.” It’s central to our understanding of options.
At any moment in time, every option is said to be either “IN the money,” “OUT of the money,” or “AT the money.” This “moneyness” has nothing to do with anyone’s profit or loss. It refers strictly to the relationship between the strike price of the option on the one hand, and the current price of the underlying asset on the other.
In our original example, which you can read about here, we talked about September options to buy Apple stock at $650 per share. At the time, the stock was trading around $673. Those $650 calls would have let us buy the stock at a $23 discount ($673 – $650). Put another way, if we somehow got those options for free, we could have exercised them and bought the stock for $650; then immediately sold the stock on the open market for $673. If so we would have made $23. So $23 is the amount by which those options were in the money. We say they were “$23 in the money,” or “in the money by $23”. We also say that they had intrinsic value of $23. Intrinsic value is the amount by which an option is in the money, if any. This in-the-money amount, or intrinsic value, changes second-by-second as the stock price changes. At any given moment, it is the amount of money we could make if we got the options for free, exercised them at that moment, and then instantly liquidated the resulting stock position.
Put options, which are options to sell an… Continue Reading
