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Call Options and Put Options
In the case of call options, any option that has a strike price that is higher than the actual price of the stock or commodity is looked on as an out of the money OTM. For instance, if XYZ is at $21, it would mean that any strike that is over that of $21 is OTM. All of the prices that are priced close to the actual price of the stock are viewed as ATM. The XYZ $20 or $22.50 strike would then be seen as ATM. Finally any call option strike price that is under the actual price of the security would be seen as an in the money ITM call option. If XYZ were at $21, all of the strikes under that would be ITM. This would be the $20 strike and lesser. Put options and these are exactly the opposite. In the case of options that have a strike price that is below the actual price of the stock or commodity is known as OTM. For instance, if XYZ were at $21, it would mean that any strikes that are under that amount are OTM. If the strike is priced close to the actual stock price it is known as ATM. The XYZ $20 or $22.50 strikes would then be looked at as ATM. Finally, if there is any put option strike price that is over the actual price of the security is known as an ITM put option. If XYZ is at $21, any of the strikes that are higher than that would be considered ITM. It is essential to learn about these terms given that each of them will behave differently in given the amount of the option being in, at, or out of the money. The idea and benefit of buying call options instead of paying for the stocks is because of the quantity of leverage one is able to obtain. If you have options, you only have to pay a fraction of what the stock would actually cost, however you are able to gain the control of the equal amount of shares. The idea and advantage of purchasing call options instead of paying for stock is due to the quantity of leverage one can obtain. With options, a person only needs to pay a part of what the stock would cost, however they would still be in control over the same quantity of shares. Given the fact that the option contract is the same as that of one hundred shares of stock, a person could in theory manage hundreds or even thousands of shares of stock for only a few hundred dollars. However, even if a person now has this wonderful leverage, they still need to be aware of which are the strike prices that will take them to obtaining the best advantage of that precise leverage.
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