This article comes from the official account: Option Understand
"In-the-money options" and "out-of-the-money options" are based on the relationship between the strike price of an option and the current price of the underlying asset. #期权日记##期权交易##上证50etf期权#
The difference between in-the-money and out-of-the-money options
Intrinsic value differences
In-the-money options have intrinsic value and are advantageous for the buyer to exercise their rights, while out-of-the-money options lack intrinsic value and are generally not a favorable option for the option holder to exercise their rights.
Profit and loss differences
1. In the case of in-the-money options, due to their intrinsic value, buyers may make a profit when exercising the option because they can buy (or sell) the asset at a cost lower than the current market price, and may still have a surplus after deducting premiums and other transaction costs.
2. For out-of-the-money options, exercising means buying (or selling) the asset at a price above the market price, which usually results in a loss. As a result, investors who hold out-of-the-money options often choose not to exercise the option and instead forfeit the premium they paid for the option contract.
What are the in-the-money options?
An in-the-money period is an option where the strike price (exercise price) is more favorable to the holder than the current market price. For Call Options, in-the-money means that the strike price is lower than the current market price, and for Put Options, in-the-money means that the strike price is higher than the current market price. In-the-money options have intrinsic value, but they are also often accompanied by higher premiums (option prices).
In-the-money options are suitable for the following situations:
1. Strong market belief: If an investor has a strong belief in the future price movement of a stock, they may choose to buy in-the-money options for greater profit potential, as in-the-money options already have intrinsic value.
2. Hedging purposes: Investors may buy in-the-money put options to hedge their stock positions, as in-the-money put options provide more direct protection when the stock price falls.
3. Exercise Readiness: When investors intend to exercise options to buy or sell actual stocks, they may be inclined to buy in-the-money options because these options are already in a profitable state.
4. Spot Profit: Because in-the-money options have intrinsic value, they can be sold at the time of exercise or before the option expires for an instant profit.
What does out-of-the-money options apply to?
An out-of-the-money option is an option in which the strike price is unfavorable relative to the current market price of the underlying asset. In the case of a call option, the strike price is higher than the market price of the underlying asset, while in the case of a put option, the strike price is lower than the market price of the underlying asset.
While out-of-the-money options have no intrinsic value at the time of exercise, they may still have a time value, meaning that the price of the underlying asset may move before the option expires.
Out-of-the-money options are suitable for the following scenarios:
Market Movement Expectations: If investors strongly anticipate that the price of the underlying asset will move significantly and that such movement is beneficial to their holdings, they may opt for out-of-the-money options because they are less expensive than in-the-money options.
Buying for speculative purposes: Investors may purchase out-of-the-money options for speculative purposes, especially if they anticipate that the market is about to experience significant volatility.
Strategy Trading: When executing certain complex trading strategies, investors may use a combination of out-of-the-money options and other financial instruments to achieve specific risk/return objectives.
Time Value Utilization: Although options are out-of-the-money, investors may purchase these options to take advantage of their time value if they believe that the price of the underlying asset is likely to change before the option expires.
Volatility trading: When market volatility rises, the value of options may also rise, even if they are out-of-the-money, as increased volatility increases the uncertainty of the option's exercise, thereby increasing the time value of the option.