Now that you are comfortable determining the ‘moneyness’ of buy call options, I will introduce you to the power of buy put options and their “moneyness”.
AUD/USD has been in a steady downtrend over the past six months. This Thursday, the market has several volatile events for the Australian dollar and the U.S. dollar, such as Australian Employment Change, Australian Unemployment Rate, and U.S. Retail Sales. Those events are likely to impact the AUD/USD. Buying a Put option would allow you profit from a continuation of the pairs downtrend. Read “The Put Option” lesson for an introduction on buying Put options.
Next, you need to decide on the strike of the put option. Depending on the strike level, an option can be in one of three states:
• An option is at-the-money (ATM) when the strike rate equals the underlying market rate. For example, if AUD/USD is trading at 0.7700 and you buy a Put option with strike 0.7700, 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 AUD/USD is trading at 0.7700 and you buy a Put with strike 0.7800, the option would be considered ITM because 0.7800 is a better sell rate than 0.7700.
• An option is out-of-the-money (OTM) when the strike rate is worse than the underlying market rate. For example, if AUD/USD is trading at 0.7700 and you buy a Put with strike 0.7600, the option would be considered OTM because 0.7600 is a worse sell rate than 0.7700.
The table below shows the different states of a Put and Call of a strike level in relation to market level changes.
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).
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 the cheapest. 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) Put option
When you buy a Put option with a strike equal to the market rate, it is at-the-money (ATM). If the market subsequently rises, the option will be out-of-the-money (OTM) because the sell price of the strike is lower than the market. But if the market falls, the option will be in-the-money (ITM) as the strike is more attractive than market. The diagram below demonstrates this concept.
Example of buying Long Put option – ATM, OTM, ITM
The following three images depict AUD/USD buy Put options ATM, OTM, and ITM.
In the ATM buy Put option image above, the underlying AUD/USD market rate and the strike are the same at 0.77325 and the option costs 277.72 USD to buy
In the OTM buy Put option above, a strike price -2% below market has been selected. This means the trader is reserving a worse rate than what is currently available in the market and the cost to buy the option has decreased to 65.60 USD.
In the ITM buy call option above, a strike price +2% above market has been selected. This means the trader is reserving a better rate than the market and the cost to buy the option has increased to 840.29 USD.
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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