Understanding “Moneyness” in options trading.

in Banking and Finance4 years ago

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Moneyness
Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security.
In options trading, terms such as in-the-money, out-of-the-money and at-the-money describe the moneyness of options.

In-the-Money (ITM)
A call option is in-the-money when its strike price is below the current trading price of the underlying asset. A put option is in-the-money when its strike price is above the current trading price of the underlying asset.

In-the-money options are generally more expensive as their premiums consist of significant intrinsic value on top of their time value.

Out-of-the-Money (OTM)
Calls are out-of-the-money when their strike price is above the market price of the underlying asset. Puts are out-of-the-money when their strike price is below the market price of the underlying asset.

Out-of-the-money options have zero intrinsic value. Their entire premium is composed of only time value. Out-of-the-money options are cheaper than in-the-money options as they possess greater likelihood of expiring worthless.

At-the-Money (ATM)
An at-the-money option is a call or put option that has a strike price that is equal to the market price of the underlying asset.

Like OTM options, ATM options possess no intrinsic value and contain only time value which is greatly influenced by the volatility of the underlying security and the passage of time.

Which one should you buy and which one should you sell?

Buying
If you like buying, I suggest ITM (In the money) because options tend to have more intrinsic value, which makes their value increase more then the other two choices ATM and OTM when the stock price rises. Plus their higher intrinsic value from being in the money means their value doesn’t drop as quickly as at the money or out of the money options when the price of the underlying asset falls. So if you want to buy options, I recommend ITM options.

Selling
If you are selling options I recommend OTM options because they have no intrinsic value and are completely extrinsic value, which is all time value. This means their price falls each day, so they become cheaper to buy back every day you wait. Also OTM options are much farther from the current market then ITM and ATM options, so the likelihood of the stock reaching their strike price is very low. So your chance of a successful trade is better.

✍🏼 by Shortsegments.

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Title: Understanding “Moneyness” in options trading.

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Thanks for the valuable lesson. I think I will diversify my trades and also enter into stocks and options, because these markets are less manipulated , but the returns will be less than the returns in cryptocurrencies what you think @shortsegments

The returns vary depending on whether you engage in high probability run trades with 5-15% ROI and low probability trades with higher ROI and lower probability of success. I would suggest you start with higher probability short term trades which normally have higher rates of success but lower returns. The most conservative options trades to start are covered call trades, but they can be consistent and relatively safe trades for monthly or weekly income. But during times of volatility all trades have increased risk.

Thank you for informations , sir what do you think about the cryptocurrency market and the investment in which the returns are great and the risk is big for the other markets because it is manipulated .
I think it is better to focus on one market and then gradually expand to the rest of the market

Please, does this options relate to the ExpertOption app for trading?

Hi
I am unfamiliar with that App, but if it trades options these terms will be useful to know because they are a central part of trading terminology.

Excellent post keep up the good work 🤝 stay safe 👍🏾 !trdo
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Thank you for the compliment.

This is very useful post, I'm forex trader and of course we all know that trading is the hardest way to make easy money, and btw your information is very good for traders.

Thank you for the comment and compliment.

you're wellcome sir

congrats nice post

interesting concept management, did not know those terms, one of the few publications that can be seen that offer something additional to the knowledge of those of us in this environment

Thanks, I appreciate the comment and compliment.

I would like to ask to stop the abusive use of bitbots.

It seems few others care

money? yes money is the key. everyone want money

Hello, I have no problem with bidbots and promoting content.

This just seems a bit over-rewarded.

How are the votes purchased?

Let's start up the bidbots right, with some standards and allow people to both profit and promote excellent content! I would welcome them back if done well.

Hi,
I am using the Steem I bought to pay for the bidbots. I agree that it is a good way to promote my posts.

In terms of the rewards, as you are aware curation takes 50% of the rewards, and since the blockchain is very transparent, you may also know that an additional 1-4% of the reward is returned to the reward pool by early voters. I think, If you take into account these factors I am getting the cost of the votes back and sometimes a modest profit. The profit is proportional to the investment, but it’s not a guaranteed profit.

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