Question
In which of the following situation will a call option
will be called “out the money”?Solution
In an option contract, an option will be exercised only when the option holder is in a favorable position with respect to the strike price as per the options contract vis-à-vis the market price of the underlying asset. As such, the option holder calculates his potential profit or loss to him if he exercises the option. This potential profit or loss is referred to as the money-ness of the option. There can be three scenarios:
Note – for calculating the money-ness of option contract the option premium is not considered; however, for the total profit calculation, the option premium will also be taken into account. Money-ness Call Option (i.e. option to Buy) Put Option (i.e. option to Sell) In the Money (i.e. profit and hence option will be exercised) Market Price (or spot price)> Strike Price Market Price (or spot price) < Strike Price At the Money (indifferent) Market price (or Spot Price) = Strike Price Out of the Money (i.e. loss and hence option will not be exercised) Market Price (or spot price) < Strike Price Market Price (or spot price) > Strike Price
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