Now that you are comfortable calculating “Profit/Loss at expiry” to buy options, I would like to show you how changing the strike of the option affects the overall value of it. The strike of an option will always be in one of three states: In-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).
Since there are several news events for both the euro and the greenback on Monday, EUR/USD will be potentially more volatile. When buying options, increasing volatility in the future is good. So let’s evaluate whether you would want to buy your options at-the-money, in-the-money, or out-of-the-money (terms you will frequently hear when trading options).
• An option is at-the-money (ATM) when the strike rate equals the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call option with strike 1.1200 the option is ATM.
• An option is in-the-money (ITM) when the strike rate is better than the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call with strike 1.1100 the option would be considered ITM because 1.1100 is a better buy rate than 1.1200.
• An option is out-of-the-money (OTM) when the strike rate is worse than the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call with strike 1.1300 the option would be considered OTM because 1.1300 is a worse buy rate than 1.1200.
These states are known as an option’s ‘moneyness’.
When an option is in-the-money (ITM), it is more valuable, i.e. its premium is higher. Hence, ITM options are the most expensive to buy, whereas out-of-the-money (OTM) options are cheaper. Paying more for an option means you are risking more, however an ITM option has a higher probability of returning a profit. Buying an OTM option is a smaller risk, but the probability of profit is lower. In each trade, you enter a strike rate depending on your market outlook and risk appetite.
When you buy a Call option with a strike equal to the market rate, it is at-the-money (ATM). If the market rises, the option will become ITM since the buy price of the strike is cheaper than the market. But if the market falls, the option will become OTM. The diagram below demonstrates this concept.
In the ATM buy call option image above, the underlying EUR/USD rate was trading at 1.12252 and valued at 345.47 USD.
Setting an option with a strike of 0% means the strike will also be 1.12252.
In the OTM buy call option above, a strike price +2% above market has been selected. This means the trader is reserving a worse rate than what is currently available in the market and the following happens – the value of the option decreases to 54.50 USD.
In the ITM buy call option above, a strike price -2% below market has been selected. This means the trader is reserving a better rate than the market and the following happens – the value of the option increases to 1,190.11 USD.
Note: A Put option, with the same strike rate, will always be in a different state to the Call option unless the strike rate equals the market, then both the Put and Call will be at-the-money (ATM). The table below shows the different states of a Put and Call as the strike level in relation to market level changes.
Since there are several news events for both the euro and the greenback on Monday, EUR/USD will be potentially more volatile. When buying options, increasing volatility in the future is good. So let’s evaluate whether you would want to buy your options at-the-money, in-the-money, or out-of-the-money (terms you will frequently hear when trading options).
• An option is at-the-money (ATM) when the strike rate equals the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call option with strike 1.1200 the option is ATM.
• An option is in-the-money (ITM) when the strike rate is better than the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call with strike 1.1100 the option would be considered ITM because 1.1100 is a better buy rate than 1.1200.
• An option is out-of-the-money (OTM) when the strike rate is worse than the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call with strike 1.1300 the option would be considered OTM because 1.1300 is a worse buy rate than 1.1200.
These states are known as an option’s ‘moneyness’.
When an option is in-the-money (ITM), it is more valuable, i.e. its premium is higher. Hence, ITM options are the most expensive to buy, whereas out-of-the-money (OTM) options are cheaper. Paying more for an option means you are risking more, however an ITM option has a higher probability of returning a profit. Buying an OTM option is a smaller risk, but the probability of profit is lower. In each trade, you enter a strike rate depending on your market outlook and risk appetite.
Buying an at-the-money (ATM) Call option
When you buy a Call option with a strike equal to the market rate, it is at-the-money (ATM). If the market rises, the option will become ITM since the buy price of the strike is cheaper than the market. But if the market falls, the option will become OTM. The diagram below demonstrates this concept.
Example of buying Long Call option – ATM, OTM, ITM
The following three images depict EUR/USD buy call options ATM, OTM, and ITM.In the ATM buy call option image above, the underlying EUR/USD rate was trading at 1.12252 and valued at 345.47 USD.
Setting an option with a strike of 0% means the strike will also be 1.12252.
In the OTM buy call option above, a strike price +2% above market has been selected. This means the trader is reserving a worse rate than what is currently available in the market and the following happens – the value of the option decreases to 54.50 USD.
In the ITM buy call option above, a strike price -2% below market has been selected. This means the trader is reserving a better rate than the market and the following happens – the value of the option increases to 1,190.11 USD.
Note: A Put option, with the same strike rate, will always be in a different state to the Call option unless the strike rate equals the market, then both the Put and Call will be at-the-money (ATM). The table below shows the different states of a Put and Call as the strike level in relation to market level changes.
Editors’ Picks
EUR/USD remains bid, focus stays on 1.1900
EUR/USD has broken its two-day run of losses and is ticking modestly higher on Thursday, hovering around the 1.1880 area as the US Dollar struggles to find clear direction. Weekly Initial Jobless Claims rose more than expected, taking a bit of shine off the Greenback, but markets are largely in wait-and-see mode ahead of Friday’s US CPI release.
GBP/USD sticks to the bid bias, still below 1.3700
GBP/USD is trading with decent gains around 1.3650 on Thursday. Indeed, Cable is attempting to shake off the weakness seen earlier in the week amid another choppy session for the Greenback, while a run of disappointing UK data has so far failed to derail the pair’s tentative recovery.
USD/JPY consolidates around 153.00 favoured by lower Fed easing bets
USD/JPY steadies around 153.00 after hitting two-week lows at 152.25. A strong US Nonfarm Payrolls report provided some support for the US Dollar on Wednesday. The Yen remains on track for a 2.6% weekly rally, boosted by Takaichi's victory at Sunday's elections.
Editors’ Picks
Gold plummets towards $4,900 as market players run into the USD
Gold plunges in the American session on Thursday, down over $150 a troy ounce in little less than an hour. Wall Street's collapse seems to be behind the ongoing US Dollar renewed strength, with the tech and the housing sectors leading the slump.
EUR/USD remains bid, focus stays on 1.1900
EUR/USD has broken its two-day run of losses and is ticking modestly higher on Thursday, hovering around the 1.1880 area as the US Dollar struggles to find clear direction. Weekly Initial Jobless Claims rose more than expected, taking a bit of shine off the Greenback, but markets are largely in wait-and-see mode ahead of Friday’s US CPI release.
GBP/USD sticks to the bid bias, still below 1.3700
GBP/USD is trading with decent gains around 1.3650 on Thursday. Indeed, Cable is attempting to shake off the weakness seen earlier in the week amid another choppy session for the Greenback, while a run of disappointing UK data has so far failed to derail the pair’s tentative recovery.
LayerZero Price Forecast: ZRO steadies as markets digest Zero blockchain announcement
LayerZero (ZRO) trades above $2.00 at press time on Thursday, holding steady after a 17% rebound the previous day, which aligned with the public announcement of the Zero blockchain and Cathie Wood joining the advisory board.
A tale of two labour markets: Headline strength masks underlying weakness
Undoubtedly, yesterday’s delayed US January jobs report delivered a strong headline – one that surpassed most estimates. However, optimism quickly faded amid sobering benchmark revisions.
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