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 clings to small gains near 1.1750
Following a short-lasting correction in the early European session, EUR/USD regains its traction and clings to moderate gains at around 1.1750 on Monday. Nevertheless, the pair's volatility remains low, with investors awaiting this weeks key data releases from the US and the ECB policy announcements.
GBP/USD edges higher toward 1.3400 ahead of US data and BoE
GBP/USD reverses its direction and advances toward 1.3400 following a drop to the 1.3350 area earlier in the day. The US Dollar struggles to gather recovery momentum as markets await Tuesday's Nonfarm Payrolls data, while the Pound Sterling holds steady ahead of the BoE policy announcements later in the week.
Japanese Yen adds to strong gains and drags USD/JPY to 155.00 amid hawkish BoJ bets
The Japanese Yen extends its steady intraday ascent through the Asian session on Monday, dragging the USD/JPY pair to the 155.00 psychological mark in the last hour. Against the backdrop of the recent shift in rhetoric from Bank of Japan Governor Kazuo Ueda, an improvement in business confidence reaffirms market bets for an imminent rate hike this week.
Editors’ Picks
EUR/USD clings to small gains near 1.1750
Following a short-lasting correction in the early European session, EUR/USD regains its traction and clings to moderate gains at around 1.1750 on Monday. Nevertheless, the pair's volatility remains low, with investors awaiting this weeks key data releases from the US and the ECB policy announcements.
GBP/USD edges higher toward 1.3400 ahead of US data and BoE
GBP/USD reverses its direction and advances toward 1.3400 following a drop to the 1.3350 area earlier in the day. The US Dollar struggles to gather recovery momentum as markets await Tuesday's Nonfarm Payrolls data, while the Pound Sterling holds steady ahead of the BoE policy announcements later in the week.
Gold stuck around $4,300 as markets turn cautious
Gold loses its bullish momentum and retreats below $4,350 after testing this level earlier on Monday. XAU/USD, however, stays in positive territory as the US Dollar remains on the back foot on growing expectations for a dovish Fed policy outlook next year.
Solana consolidates as spot ETF inflows near $1 billion signal institutional dip-buying
Solana price hovers above $131 at the time of writing on Monday, nearing the upper boundary of a falling wedge pattern, awaiting a decisive breakout. On the institutional side, demand for spot Solana Exchange-Traded Funds remained firm, pushing total assets under management to nearly $1 billion since launch.
Big week ends with big doubts
The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market.
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