Forex Talking

Exchange traded stock options are usually listed with three, six and nine months of life and with various exercise prices. As time passes options expire (some worth something and some worthless) and so the exchanges usually list new ones.

A call option whose exercise price is below the current stock price is referred to as being in-the-money. A call option whose exercise price is above the current stock price is referred to as being out-of-the-money. A call option whose exercise price is equal to or nearly equal to the current stock price is referred to as being at-the-money. Most exchanges continually list options so there is at least one in-the-money and one out-of-the-money option for each expiry cycle.

In the definition of a call option above the expression "on or before a given date" means that the option is American style. This means that the holder can, if so wishing, exercise early and need not bother waiting until the final day. There are some options that can only be exercised on the expiry day. Such options are termed European style. In most instances the pricing difference between the two types is zero or small. Call options can obviously be very profitable investments.

As an example: In the situation above with IBM stock trading at $102 in the market, the in-the money
Three-month call option with an exercise price of $100 may be priced at something like $3.50 per share. Option prices are always quoted on a per share basis. However, each IBM option is a contract for 100 shares and so one option would cost 100 X 3.50 = $350. Here we will always refer to the price of an option on a per share basis. For continuity we will always assume that option contracts are for 100 shares.

Accordingly an option value or price will sometimes be referred to as $3.50 and sometimes $350. We say that this option is already $2 in-the-money, meaning that if it were immediately exercised one could recoup at least the difference between the market price and the exercise price.

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