In-the-Money / Out-of-the-Money Definition
In the context of cryptocurrency options trading, “In-the-Money” (ITM) refers to a situation where the strike price of an option is favorable compared to the current market price of the underlying asset. On the other hand, “Out-of-the-Money” (OTM) refers to a situation where the strike price of an option is not favorable compared to the current market price of the underlying asset.
In-the-Money / Out-of-the-Money Key Points
- In-the-Money (ITM) options are those with a strike price that is favorable compared to the current market price of the underlying asset.
- Out-of-the-Money (OTM) options are those with a strike price that is unfavorable compared to the current market price of the underlying asset.
- These terms are used in options trading, which is a type of derivative trading that gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price (the strike price) within a certain time period.
- The value of ITM and OTM options can change rapidly with fluctuations in the market price of the underlying asset.
What is In-the-Money / Out-of-the-Money?
In-the-Money and Out-of-the-Money are terms used to describe the relationship between the strike price of an option and the current market price of the underlying asset.
For a call option (the right to buy), an option is considered ITM if the market price of the underlying asset is higher than the strike price. This is because the buyer has the right to buy the asset at a price lower than the current market price. Conversely, a call option is considered OTM if the market price of the underlying asset is lower than the strike price.
For a put option (the right to sell), an option is considered ITM if the market price of the underlying asset is lower than the strike price. This is because the buyer has the right to sell the asset at a price higher than the current market price. Conversely, a put option is considered OTM if the market price of the underlying asset is higher than the strike price.
Why is In-the-Money / Out-of-the-Money important?
Understanding the concepts of ITM and OTM is crucial for anyone involved in options trading. These terms can help traders make informed decisions about which options to buy or sell, and when to exercise their options.
ITM options are generally more expensive to buy than OTM options, because they have intrinsic value. However, they also offer more protection against unfavorable price movements in the underlying asset.
OTM options are cheaper to buy, but they are also more risky. They become worthless if the market price of the underlying asset does not move in the favorable direction before the option expires.
When is an option considered In-the-Money / Out-of-the-Money?
An option is considered ITM or OTM at any point in time before it expires, based on the current market price of the underlying asset. The status of an option can change rapidly with fluctuations in the market price.
How is In-the-Money / Out-of-the-Money determined?
The status of an option as ITM or OTM is determined by comparing the strike price of the option with the current market price of the underlying asset. If the comparison is favorable for the buyer of the option, it is considered ITM. If the comparison is unfavorable, it is considered OTM.
