Q Please, Explain - In the Money, At the Money & Out of the money in Options.. ?
An option is told to be 'at-the-money', when the option's strike price is equal to the underlying asset price. This is true for both puts & calls Options.
A call option is said to be 'in the money' when the strike price of the option is less than the underlying asset price.
For example, a Stock AB call option with strike of 4000 is in-the-money", when the spot price of Stock AB is at 4200 as the call option has a positive exercise value. The call option holder has the right to buy the Stock AB at 4000, no matter by what amount the spot price exceeded the strike price. With the spot price at 4200, selling Stock AB at this higher price, one can make a profit.
On the other hand, a call option is 'out of the money' when the strike price is greater than the underlying asset price. Using the earlier example of Sensex call option, if the Sensex falls to 3800, the call option no longer has positive exercise value. The call holder will not exercise the option to buy Sensex at 4000 when the current price is at 3800 & allow his "option" right to lapse.
Graph Source: http://www.extension.iastate.edu
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