Options In the Money and Out of the Money

Put option in the money

put option in the money

When Is a Put "In the Money? The " moneyness " of an option describes a situation that relates the strike price of a derivative to the price of the derivative's underlying security.

put option in the money

A put option can either be out of the money, at the money or in the money. An in the money put option is one where its strike price is greater than the market price of the underlying asset.

That means the put holder has the right to sell the underlying at a price that is greater than where it currently trades.

put option in the money

This allows for an immediate profit if they buy the shares back at the market price, therefore the price of an in the money put closely tracks changes in the underlying. How Do Put Options Work?

A put option buyer grants the right — but not the obligation — to sell a specified quantity of the underlying security at a predetermined strike price on or before its expiration date.

put option in the money

Put options are used as downside protection since if you own the underlying asset and you put option in the money the right to sell it at some price, it effectively gives you a guaranteed floor price.

Put options can also be used to speculate on an underlying if you think that it will go down in price. Thus, a put can give short market exposure with limited risk if the underlying in fact rises.

Put Options Lesson 3: How to Manage ITM Short Put Options (SPY)

A put option should only be exercised if the underlying security is in the money. When Is a Put Option "in the Money?

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When there is a right to sell the underlying security above its current market price, the right to sell has value equal to at least the amount of the sale price less the current market price.

An in the money put option therefore is one where the strike price is above the current market price. A put option buyer is hoping the stock's price will fall far enough below the option's strike to at least cover the cost of the premium for buying the put. The amount that a put option's strike price is greater than the current underlying security's price is known as intrinsic value because the put option is worth at least that amount.

Instrument models[ edit ] The terms for exercising the option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration. The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss.

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