The strike price, also referred to as the exercise price is the pre-determined price at which the option is exercised and is fixed for the period of the contract.
There are three areas to look at:
- In The Money - ITM
- At The Money - ATM
- Out Of The Money - OTM
In The Money
An option with an intrinsic value is In The Money (ITM). The option is making money for the taker (buyer) by allowing them to BUY shares for less than the market price. so a Call Option is In The Money when the strike price is BELOW the current share price.
Example: XYZ strike price $10.00 Call Option is $0.50 cents in the money when the current market price is at $10.50.
Example: XYZ strike price $10.00 Put Option is $0.50 cents in the money when the current market price is at $9.50.
At The Money
An option is At The Money (ATM) when the strike price is equal to the current share price. This is the same for both Call & Put Options.
Out Of The Money
An option is Out Of The Money (OTM) when the share price moves in the opposite direction to the share strike price.
Example: XYZ strike price $10.00 Call Option is $0.50 cents is out of the money when the current market price is at $9.50.
Example: XYZ strike price $10.00 Put Option is $0.50 cents is out of the money when the current market price is at $10.50.
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