What is in-money and what is out-of-money in an options contract?

Satya Sheel, Meerut

Suppose you buy a call option that gives you the right to buy a share at Rs 1,000 after a month by paying an option fee of Rs 5. And after a month the quotation for the share is Rs 1,010. You are in the money.

Suppose you had bought a put option that gives you the right to sell a share at Rs 1,000 after a month by paying an option fee of Rs 5, and after a month the share quotes at Rs 990.

Again you are in the money. In-the-money means an option the exercise of which leaves some money on the table for the buyer of the option.

In the first case, you can buy at the strike price of Rs 1,000 and sell in the cash segment for Rs 1010 and in the second case you can buy the share in the cash segment for Rs 990 and sell at the strike price of Rs 1,000.

In both the cases, you are in the money. Of course the option fee has to be factored in while computing the overall profit. Out-of-money means when you stand to incur a loss by exercising the option.

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(This article was published on April 24, 2011)
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