Binary options are offered against a fixed expiry time. There are three possible outcomes when the expiration time has been reached. You may be at-the-money, a term used to describe a neutral loss and gain as a result of the asset value at expiry being exactly what it was at purchase. In-the-money, is a term used to describe an investor finishing in a position where they realize a profit or finally out-of-the-money, a term used to describe an investor finishing in a position where they experience a loss.
From time to time, while you are trading you will come across some abbreviated terms for the above “at-the-money” abbreviated as “ATM”, “OTM” which mean “out-of-the-money” and ITM which is “in-the-money”.
It is called “in-the-money” as the trader who has selected the CALL or PUT has made the correct prediction, as to whether the final price would be below or above its current market price. Being in-the-money does refer to profiting however there are two ways of profiting as illustrated in a and b –
a) In-the-Money Call
When selecting the Call option, it is understood to be in-the-money when the current market price of the underlying asset is above the strike price, when it hits it expiry time. That value is also referred to as the option’s “intrinsic value“. That value is equal to what you have purchased the asset for (strike price) which is generally below the market price. The “in-the-money” notion is the value that your call options’ strike price is below the current asset price is called its intrinsic value since you know it is worth the very least at the stated amount you purchased it for.
b) In-the-Money Put
A put option is said to be in-the-money is when the strike price of the PUT or Sell option is above the current price of the asset. It is “in-the-money” is the relative term even when you sell as the trader can exercise his right to sell the asset at a price higher than what it is at the time of the PUT, making the intrinsic value higher than that of the initial purchase value, and it is worth at the very least that exact amount you started off with. When the value is equivalent to at least the amount that your strike price is beyond the market price, you are still in-the-money, as long as the price / value of the put is higher than the initial price of the underlying asset.
At-the-money is a term not often heard within the industry as it rarely occurs, in binary trading. An option that is traded is characterised “At-the-money” if the occasion arises that the current price of the underlying asset is equal to the strike price, I like to think of it as a ‘break-even’ point. This does not apply to any specific option selected, you could have chosen either a call or a put and it would not have any leverage on being at-the-money.
It is called “Out-of-the-Money” as the trader who has selected the CALL or PUT has made the wrong prediction, as to whether the final price would be below or above its current market price. Being Out-of-the-money does refer to losing however there are two ways of profiting as illustrated in a and b –
a) Out-of-the-Money Call
Out-of-the-money via selection of a CALL option is understood to be correct if the current price of the underlying asset is below or lower the strike price of the option.
b) Out-of-the-Money Put
On the other hand if a PUT has been selected and you are said to be out-of-the-money if the current price of the asset selected to trade is above / or higher than the strike price.
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