The next set of terms are in-the-money (ITM), at-the-money (ATM), and out-of-the-money (OTM) options. To determine the money status of an option depends on which point of view we are to assume. If one is Long the option, we have purchased the option and will decide whether or not to exercise the option. If one is Short the option, we have sold the option to a buyer and have the obligation to meet the terms of the contract if it is exercised. We will use the following examples from those who are Buyers and are taking a Long position.

We have a Call Option that has a Strike Price of $100. An option would be ITM if the stock price were $100.01 or greater. An option would be ATM if the stock price were exactly $100.00. An option would be OTM if the stock were $99.99 or less.

We have a Put Option that has a Strike Price of $100. An option would be ITM if the stock price were $99.99 or less. An option would be ATM if the stock price were exactly $100.00. An option would be OTM if the stock were $100.00 or more.

As a buyer of an option, you want your options to expire ITM. But just because an option expires ITM doesn’t mean that a buyer wants to exercise the option. If the option is $0.01 ITM, it may cost more to exercise the option and sell the stock than to let the option expire worthless.

As a seller, you want your options to expire OTM. If an option expires OTM, there is nothing more a seller needs to do. The option expires worthless and there is no longer an obligation to buy the stock in the case of a put, or sell the stock in the case of a call.

There are many more terms when dealing with options and we will eventually cover those in an Advanced Options Terminology section. There are also just as many different options strategies that one can use. Each strategy is used for a different purpose. Whether you are hedging a position or purely speculating, options is another way to enhance your position.