1. in money (ITM – in the money)
For this option, its execution allows either buy an asset cheaper, what is it on the market now, or sell it more expensive.
Example: Futures on an ordinary share of Sberbank costs 14 000 rub. (100 shares) – 120 Call (we have the right to buy shares at 120 rub.) and 160 Put (we have the right to sell shares at 160 rub.)
2. on money (ATM – at the money)
Strike this option roughly equal (closest) to the BA price. So-called center strike (remember this concept, it will be used frequently). In this way, exercising this option does not give any advantage, because. the asset price on the market is approximately the same.
140 Call and 140 Put
3. out of money (OTM – out of the money)
For this option, its execution is not profitable, because. does not allow you to buy an asset cheaper, what is it on the market now, nor sell it for more. In this case, it is easier to buy (sell) underlying asset in the market, than under the terms of the option.
160 Call and 120 Put
Beginner traders often think wrong, what if ITM option, then it is profitable, and if OTM is unprofitable. This is wrong. And here are two examples.
Example 1. Let's admit, futures on an ordinary share of Sberbank costs 14 000 rub.
Long Call 13 500 (Bonus = 830 rub.). This option is in the money (IT), but it does not mean, that he is profitable. Options, as we remember, American type, ie. we have the right to execute it at any time, even immediately after purchase. If we now apply for expiration and execute it, we get profit 500 rub. We have the right to buy BA by 13 500, and on the market he 14 000. But we paid for this right 830 rubles. In this way, when exercising this option, we will receive total loss in size 330 rubles.
Example 2. Futures on an ordinary share of Sberbank costs 14 000 rub.
Long Call 15 000 (Bonus = 250 rub.). This option is out of the money (OTM). If the FShS rises in price now, eg, on 5 rubles (14 500 rub.), our the option will remain out of the money, but its price will be higher (440 rub.), and when selling this option in the order book, we will get a profit.
In this way, in both examples you can see, that the financial result of our position is determined by the amount of the premium paid, not his condition (ITM or OTM).