The following article from ORE, describes an option’s moneyness and why choosing a strike rate to match your market outlook is important.
An option can be described as being in one of three states depending on the position of the market price with respect to the option's strike rate. If the market rate equals the strike, the option is at-the-money (ATM). If the market is better than the strike, the option is out-of-the-money (OTM). Finally, if the market is worse than the strike, the option is in-the-money (ITM).
Why does it matter? A key factor in determining an option's value is the market rate versus the strike. In-the-money (ITM) options are the most expensive and out-the-money (OTM) options are the cheapest. The more bullish you are when speculating the markets, the further out-of-the-money you can buy an option (and the cheaper it will be), which creates a highly-leveraged trade.
For example, below is a GBP/USD, 2-day call option in the amount of GBP 10,000 shown with three different strike rates. The underlying GBP/USD mid-rate was around 1.5040. Notice how the out-the-money (OTM) call with a 1.5100 strike is the cheapest option to buy at USD 20.75. However, for this option to payout by expiry, the GBP/USD market rate will need to rise more comparatively with the ATM and ITM options. The further away your strike, the further away your break-even point. However, you are risking less money in the trade.
OTM Option with strike rate = 1.5100 costs USD 20.75:
ATM Option with strike rate = 1.5039 (0% from market) costs USD 42.68:
ITM Option with strike rate = 1.4900 costs USD 147.04:
The state of an open option trade may change as the underlying market rate moves around. If you buy an at-the-money (ATM) call option and the market rises, then the call becomes in-the-money (ITM). Alternatively, if the market falls below the strike the call becomes out-the-money (OTM). The long call option payout graph below indicates the state of an option at different market rates.
The state of Put options may also change as the market moves, but when you buy a Put you are positioned in the opposite direction compared with buying a call, i.e. if you hold a Put you want the market to fall. If you buy an at-the-money (ATM) Put and the market rises then the Put becomes out-the-money (OTM). But, if the market falls below the strike, the Put becomes in-the-money (ITM). The long Put option payout graph below indicates the state of an option at different market rates.
What happens at expiry? In the last article, Part 3 of the Options Game, we explained an option will only have value at expiry if its strike rate can 'beat' the market rate. If the strike is worse than or equal to the market, the option expires worthless. Hence, only ITM options will have value at expiry.
In Part 5 of The Options Game, Zoe Fiddes explains “The Time Value of an Option."
An option can be described as being in one of three states depending on the position of the market price with respect to the option's strike rate. If the market rate equals the strike, the option is at-the-money (ATM). If the market is better than the strike, the option is out-of-the-money (OTM). Finally, if the market is worse than the strike, the option is in-the-money (ITM).
Why does it matter? A key factor in determining an option's value is the market rate versus the strike. In-the-money (ITM) options are the most expensive and out-the-money (OTM) options are the cheapest. The more bullish you are when speculating the markets, the further out-of-the-money you can buy an option (and the cheaper it will be), which creates a highly-leveraged trade.
For example, below is a GBP/USD, 2-day call option in the amount of GBP 10,000 shown with three different strike rates. The underlying GBP/USD mid-rate was around 1.5040. Notice how the out-the-money (OTM) call with a 1.5100 strike is the cheapest option to buy at USD 20.75. However, for this option to payout by expiry, the GBP/USD market rate will need to rise more comparatively with the ATM and ITM options. The further away your strike, the further away your break-even point. However, you are risking less money in the trade.
OTM Option with strike rate = 1.5100 costs USD 20.75:
ATM Option with strike rate = 1.5039 (0% from market) costs USD 42.68:
ITM Option with strike rate = 1.4900 costs USD 147.04:
The state of an open option trade may change as the underlying market rate moves around. If you buy an at-the-money (ATM) call option and the market rises, then the call becomes in-the-money (ITM). Alternatively, if the market falls below the strike the call becomes out-the-money (OTM). The long call option payout graph below indicates the state of an option at different market rates.
The state of Put options may also change as the market moves, but when you buy a Put you are positioned in the opposite direction compared with buying a call, i.e. if you hold a Put you want the market to fall. If you buy an at-the-money (ATM) Put and the market rises then the Put becomes out-the-money (OTM). But, if the market falls below the strike, the Put becomes in-the-money (ITM). The long Put option payout graph below indicates the state of an option at different market rates.
What happens at expiry? In the last article, Part 3 of the Options Game, we explained an option will only have value at expiry if its strike rate can 'beat' the market rate. If the strike is worse than or equal to the market, the option expires worthless. Hence, only ITM options will have value at expiry.
In Part 5 of The Options Game, Zoe Fiddes explains “The Time Value of an Option."
Webull Introduces "Lite" Version of Trading App for Retail Users
Network, Learn, Grow | FMAS:24
Network, Learn, Grow | FMAS:24
Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
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Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
Don't miss out on this 5-second invite packed with energy and urgency!
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
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Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
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Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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