Options are derivatives, which means that they derive their price from other things, like the price of the underlying security and the time remaining until expiration.
The owner of a call option has the right, but not the obligation, to purchase the underlying security (stock or ETF) at the strike price on or before the expiration date of the option contract. The value of a call option generally rises as the price of the underlying security rises. A call option is considered to be In The Money (ITM) when its strike price is below the price of the underlying security, and Out of The Money (OTM) when its strike price is above the price of the underlying security. For example, if the increment between strike prices for SPY options is $1 and the price of SPY is currently $142.35, then the first (closest) ITM call option is the one with a strike price of $142. The first OTM call option is the $143 strike.
The owner of a put option has the right, but not the obligation, to sell the underlying security (stock or ETF) at the strike price on or before the expiration date. The value of a put option usually rises as the price of the underlying security falls. A put option is considered to be In The Money (ITM) when its strike price is above the price of the underlying security, and Out of The Money (OTM) when its strike price is below the price of the underlying security. If the price of SPY is currently $136.55, then the first (closest) ITM put option is the $137 strike, and the first OTM put option is the $136 strike.
Most option contracts control 100 shares of the underlying stock or ETF. However, the price quoted by most trading platforms is the price per share. Therefore, the cost of purchasing the option contract is typically 100 times the per‐share price, plus commissions. Thus, if a SPY call option has a quoted price of $1.27, then it will cost you $127.00 plus commissions to purchase the call option contract. Sometimes you will hear the price of an option referred to as the option’s premium.
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Connors Research Trading Strategy Series Guidebooks
Options Trading with ConnorsRSI
By Laurence Connors, Cesar Alvarez, Matt Radtke and Connors Research
A practical guidebook of strategies with clear instructions how to apply entry/exit filters that show historical tendencies to improve the winning edges and average gains of the best systematic strategies to trade SPY Options using the ConnorsRSI oscillator. (learn more)
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