In a put option, out of the money means the current stock price is above the strike price.Īt the money is when the options strike price is equal to the current stock price. In a call option, out of the money means the current stock price is below the strike price. Out of the money is when an option has no intrinsic value but has extrinsic value. With a put option, in the money means the current stock price is lower than the strike price, and the options holder can sell the stock above the current market price. With a call option, in the money means the current stock price is higher than the strike price, and you can buy the shares at the strike price or below the current market price. In the money is when an option has intrinsic value and you may exercise or sell your options for profit. There are three statuses that an option can have, in the money, out of the money, and at the money. There are times when it is better that you not exercise your options when the options are out of the money. If you don't exercise your options at the expiration date, your options will expire worthlessly. Both call and put options have an expiration date. In addition to the strike price, there is another factor that is important in options trading, and that is the expiration date.
There are two types of options contracts that you can purchase, call and put options. The strike price is a set price for the options that you can exercise your right to buy or sell the underlying contracts before the options expire. If you are bearish on the underlying stock and think the stock may go down in the near future, you may purchase put options. An option gives you the right, but not the obligation to sell the underlying stock at the strike price. If you think the underlying stock would go up in value before the expiration date, you would purchase an options contract.Ī put option is the exact opposite of call options. Each option contract covers 100 shares of the underlying stocks.Ī call option gives you the right, but not the obligation to buy the underlying stock at the strike price. The longer the expiration date, the more expensive the premium to justify the risks for options writers. Options writers collect a premium when they sell an option contract to the buyer who has the right to buy or sell the underlying stock at an agreed price and time. To have this option, the buyer has to pay a premium to the seller who writes the contract.įollowing are a few terminologies used in options trading that you must know in order to trade options.Īn option premium is the current market price for the options contract.
An option gives the buyer the option to buy or sell on the type of contract that they hold on a specified future day. Options are a type of trading instrument that are derivatives based on the value of underlying stocks or other financial assets. You can do the calculation by yourself manually or you can just plugin the number to our options profit calculator to get the results quickly. On the other hand, if the stock falls to $60 or under, then you just lose your initial investment of $500 for buying the option contracts. Therefore, you made $4,500 on this options investment. Profit Formula = Current stock value - Strike price value - Total Investment Here's how you calculate your options profit.Ĭurrent stock value = 500 x $70 = $35,000 Assume the strike price for the options is $60, and the stock has risen to $70 since you bought the options.
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