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In The Money
There are six determinants to an option’s price:
- Current price of the underlying security
- Strike price of the option
- Volatility
- Days to option expiration
- Interest Rates
- Dividends (stock options only)
The option’s price can then be broken down into two parts: Intrinsic Value and Extrinsic Value.
- Intrinsic value: This describes the relationship between the stock or commodity’s current price and the strike price of the option, and encompassesthe first and second items from the list above.
- Extrinsic value: This describes the part of the option that encompasses the first through the fourth items in the list above.
These "moneyness" relationships are described in familiar terms: Out-of-the-money (OTM), at-the-money (ATM) and in-the-money (ITM).
Moneyness Articles on Smart Profits Report:
Out-of-the-Money Options: Buyer Beware, Seller… Take The Money
In the Money Options: Make Mondays Your Discount Stock-Buying Day
A Lesson On Time Decay: How To Go In the Money For Top Buys
Trading Deep-In-The-Money Covered Calls: Dividend Paying Stocks That Can Boost Income
Buying In-the-Money Options: A Profitable Exit Strategy for Expiration Week
Deep-In-The-Money Covered Calls: How to Beat Stocks with Less Risk
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