Unit 1 · Level 1 · Calls & puts
Moneyness & the chain
Open an option chain and you'll see a menu: dozens of strikes, several expiries, calls on one side, puts on the other. 'Moneyness' is where an option stands right now: IN the money means it would have value if exercised today, AT the money means the strike sits at the stock price, OUT of the money means it's all hope for now. Same stock, wildly different prices: the chain is a menu of bets.
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What you get asked
Match each term to its meaning.
Moneyness is a snapshot, not a verdict. An OTM option can move in the money tomorrow, and vice versa.
A stock trades at €100. Which call is out of the money?
The right to buy at €110 is worthless today when the market sells at €100, so that strike is OTM. The €90 call is ITM, the €100 call is ATM.
A put is in the money when the stock trades ___ its strike.
Puts mirror calls: the right to sell at €90 only carries exercise value once the stock is under €90.
Stock at €100. On the chain, why does the €90-strike call cost more than the €110-strike call?
The €90 call is already €10 in the money, so you're buying real value plus hope. The €110 call is pure hope, which is why it's cheaper.
Far out-of-the-money options are cheap because…
Cheapness reflects probability, not generosity: a low price means the market thinks that strike is a long shot. Remember this when a €0.10 option winks at you. 🐜
The rest of this unit
The right, not the obligation: the contract at the heart of every option.