At-The-Money : In-The-Money : Out-Of-The-Money

There are three different terms used to describe both call and put options.

• At-the-money
• In-the-money, and
• Out-of-the money

We will use the BT June £1.50 call as an example. Remember that this option gives the holder the right but not obligation to buy BT stock at £1.50 on or before the June expiry.

• If the BT share price is greater than £1.50 the option will be referred to as in-the-money because it has an intrinsic value (see previous page)
  
  
• If the BT share price is less than £1.50 the option will be referred to as out-of-the-money because its premium will consist of only time value
  
  
• If the BT share price is at £1.50 the option is at-the-money
  

The thinking is obviously reversed with Put options. Using the BT June £2.00 put as an example

• If the BT share price is less than £2.00 then the Jun £2.00 put will be in the money and will have an intrinsic value
  
  
• If the BT share price is greater than £2.00 then the put option will be out of the money and its premium will consist of just time value
  
  
• If the price of BT stock is at £2.00 then the option will be at the money
  

What Does 'The Right But Not The Obligation' Mean

When describing Options the word obligation comes up time and again. What exactly does it mean?

Example using the Vodafone Jun £1.40 calls with Vodafone stock trading at £1.20

If a trader buys this Call option then he has the right but not the obligation to buy 1,000 Vodafone shares at £1.40 on or before the June expiry date.

So although the holder has the right to buy 1,000 shares, he is not is never going to be forced to buy the shares. If the share price remains below £1.40 before or on expiry then there would be no point in electing the right to buy shares at £1.40 when they can be bought for less in the cash market.