Options can be either considered at the money, in the money, or out of the money. You can tell which ones are which when you look at the option chain. 

Calls are in the money when they have a strike price below the current price of the stock. 

Puts are in the money when they have strike prices above the current price of the stock.

An option is in the money if the trader can get immediate value as they choose to exercise their contractual rights. Call option buyers have a contractual right to buy the stock, so a strike price below the current price means they can get the stock for less than market rates. On the other hand, put option buyers have the right to sell stock. So if a put option trader can initiate a short sale on the stock with a strike price that is higher than the current market price of the stock, then that put option is in the money. Let’s look at this graphic to see which options are in the money.

Here you can see that the options in the shaded area are in-the-money. They have value if the buyer exercises the contract at the current stock price. As the stock price rises above various strike prices, these contracts become in the money. Put options become in the money when stock prices fall below the strike price. Broker platforms usually find some way to these in-the-money options.

The options that are not shaded are out-of-the-money. These options have no value if they are exercised at the current stock price. Call options become out-of-the-money if the stock price falls below the strike price. Put options become out-of-the-money if the stock price rises above the strike price.

The at-the-money contract is the strike price closest to the current price of the stock. In this example, the 100 strike price is in the money for calls and out of the money for puts. The at-the-money option is more sensitive to stock price moves than any out-of-the-money options, but less expensive than any of the in-the-money options. 

Changes in an option’s price are driven by the normal market action of buyers and sellers, but also by movement of the stock price and the perception of investors. Market makers are constantly publishing new bid and ask prices for all the option contracts they offer. 

The difference between what buyers pay to secure their contractual rights and what sellers get when entering into the contract, is known as the bid/ask spread. The size of the gap between the bid and ask prices is not the same for every option. Generally, this size of this gap is affected by two things:

First, the price of the contract. The bid/ask spread is usually tighter for out-of-the-money strikes than in-the-money strikes. That’s because the in-the-money strikes are more expensive.

Second, the liquidity of the option also affects the price. The more popular, heavily traded options have tighter spreads, while less liquid options have wider spreads. 

Being able to accurately review option price information helps a trader more effectively approach the market as either a buyer or a seller of options. The next part of the Beginners Guide introduces the concept of trading approach and helps explain why traders might approach option trading in different ways.

Options can be either considered at the money, in the money, or out of the money. You can tell which ones are which when you look at the option chain. 

Calls are in the money when they have a strike price below the current price of the stock. 

Puts are in the money when they have strike prices above the current price of the stock.

An option is in the money if the trader can get immediate value as they choose to exercise their contractual rights. Call option buyers have a contractual right to buy the stock, so a strike price below the current price means they can get the stock for less than market rates. On the other hand, put option buyers have the right to sell stock. So if a put option trader can initiate a short sale on the stock with a strike price that is higher than the current market price of the stock, then that put option is in the money. Let’s look at this graphic to see which options are in the money.

Here you can see that the options in the shaded area are in-the-money. They have value if the buyer exercises the contract at the current stock price. As the stock price rises above various strike prices, these contracts become in the money. Put options become in the money when stock prices fall below the strike price. Broker platforms usually find some way to these in-the-money options.

The options that are not shaded are out-of-the-money. These options have no value if they are exercised at the current stock price. Call options become out-of-the-money if the stock price falls below the strike price. Put options become out-of-the-money if the stock price rises above the strike price.

The at-the-money contract is the strike price closest to the current price of the stock. In this example, the 100 strike price is in the money for calls and out of the money for puts. The at-the-money option is more sensitive to stock price moves than any out-of-the-money options, but less expensive than any of the in-the-money options. 

Changes in an option’s price are driven by the normal market action of buyers and sellers, but also by movement of the stock price and the perception of investors. Market makers are constantly publishing new bid and ask prices for all the option contracts they offer. 

The difference between what buyers pay to secure their contractual rights and what sellers get when entering into the contract, is known as the bid/ask spread. The size of the gap between the bid and ask prices is not the same for every option. Generally, this size of this gap is affected by two things:

First, the price of the contract. The bid/ask spread is usually tighter for out-of-the-money strikes than in-the-money strikes. That’s because the in-the-money strikes are more expensive.

Second, the liquidity of the option also affects the price. The more popular, heavily traded options have tighter spreads, while less liquid options have wider spreads. 

Being able to accurately review option price information helps a trader more effectively approach the market as either a buyer or a seller of options. The next part of the Beginners Guide introduces the concept of trading approach and helps explain why traders might approach option trading in different ways.