The strike price, or exercise price, of an option determines whether that contract is in-the-money, at-the-money, or outof-the-money. If the strike price of a call option is less thanthe current market price of the underlying security, the callis said to be in-the-money because the holder of this call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the stockmarket. Likewise, if a put option has a strike price that isgreater than the current market price of the underlying security, it is also said to be in-the-money because the holder of this put has the right to sell the stock at a price whichis greater than the price he would receive selling the stock inthe stock market.The converse of in-the-money is, not surprisingly,out-of-the-money. If the strike price equals the current market price, the option is said to be at-the-money.

The amount by which an option, call or put, is in-themoneyat any given moment is called its intrinsic value.Thus, by definition, an at-the-money or out-of-the-money option has no intrinsic value; the time value is the total option premium.This does not mean, however, theseoptions can be obtained at no cost. Any amount by which anoption’s total premium exceeds intrinsic value is called the time value portion of the premium. It is the time value portion of an option’s premium that is affected by fluctuationsin volatility, interest rates, dividend amounts and the passageof time.There are other factors that give options value,therefore affecting the premium at which they are traded.Together, all of these factors determine time value.

Equity call option:

In-the-money = strike price less than stock price

At-the-money = strike price same as stock price

Out-of-the-money = strike price greater than stock price

Equity put option:

In-the-money = strike price greater than stock price

At-the-money = strike price same as stock price

Out-of-the-money = strike price less than stock price

Option Premium = Intrinsic Value + Time Value