When is an option a certain number of strikes in the money? e.g. “two strikes in”?
"I have traded options, but not professionally. I hadn't come across this terminology, but I expect it counts how far in-the-money, as an ordinal, an option is relative to the distinct strike prices offered for the option series — a series being the combination of underlying symbol, expiration date, and option type (call/put); e.g., all January 2015 XYZ calls, no matter the strike. For instance, if stock XYZ trades today at $11 and the available January 2015 XYZ calls have strike prices of $6, $8, $10, $12, $14, and $16, then I would expect the $10 call could be called one strike in the money, the $8 two strikes in the money, etc. Similarly, the $12 and $14 calls would be one and two strikes out of the money, respectively. However, if tomorrow XYZ moves to $13, then the $10 previously known as one strike in the money would now be two strikes in the money, and the $12 would be the new one strike in the money. Perhaps this terminology arose because many option strategies frequently involve using options that are at- or near-the-money, so the ""one strike in"" (or out) of the money contracts would tend to be those employed frequently? Perhaps it makes it easier for people to describe strategies in a more general sense, without citing specific examples. However, the software developer in me dislikes it, given that the measurement is relative to both the current underlying price (which changes quickly), and the strike prices available in the given option series. Hence, I wouldn't use this terminology myself and I suggest you eschew it, too, in favor of something concrete; e.g. specify your contract strikes in dollar terms — especially when it matters."
I would suggest following your quote and having a read of the web page supplied, that buys then sells or sells short then buys (the same security on the same day) four or more times in five business days, ... So it is a two way transaction that counts as 'one'. "You can call CBOE and tell them you want that series or a particular contract. And this has nothing to do with FLEX. Tell them there is demand for it, if they ask who you are, DONT SAY YOU ARE A RETAIL INVESTOR, the contracts will be in the option chain the next day. I have done this plenty of times. The CBOE does not care and are only limited by OCC and the SEC, but the CBOE will trade and list anything if you can think of it, and convince them that ""some people want to trade it"" or that ""it has benefits for hedging"" I've gotten 50 cent strike prices on stocks under $5 , I've gotten additional LEAPS and far dated options traded, I've gotten entire large chains created. I also have been with prop shops before, so I could technically say I was a professional trader. But since you are using IB and are paying for data feeds, you can easily spin that too." The most likely explanation is that the calls are being bought as a part of a spread trade.  It doesn't have to be a super complex trade with a bunch of buys or sells. In fact, I bought a far out of the money option this morning in YHOO as a part of a simple vertical spread.  Like you said, it wouldn't make sense and wouldn't be worth it to buy that option by itself. NL7 is right and his B-S reference, a good one.   Time decay happens to occur in a way that 2X the time gives an option 1.414X (the square root of 2) times the value, so half the time means about .707 of the value.  This valuation model should help the trader decide on exactly how far out to go for a given trade. "A straddle is an options strategy in which one ""buys"" or ""sells"" options of the same maturity (expiry date) that allow the ""buyer"" or ""seller"" to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. IE: A long straddle would be: You buy a call and a put at the same strike price and the same expiration date. Your profit would be if the underlying asset(the stock) moves far enough down or up(higher then the premiums you paid for the put + call options) (In case, one waits till expiry) Profit = Expiry Level - Strike Price - (Premium Paid for Bought Options) Straddle" 1) Yes, both of your scenarios would lead to earning $10 on the transaction, at the strike date. If you purchased both of them (call it Scenario 3), you would make $20. 2) As to why this transaction may not be possible, consider the following: The Call and Put pricing you describe may not be available. What you have actually created is called 'arbitrage' - 2 identical assets can be bought and sold at different prices, leading to a zero-risk gain for the investor. In the real marketplace, if an option to buy asset X in January cost $90, would an option to sell asset X in January provide $110?  Without adding additional complexity about the features of asset x or the features of the options, buying a Call option is the same as selling a Put option [well, when selling a Put option you don't have the ability to choose whether the option is exercised, meaning buying options has value that selling options does not, but ignore that for a moment]. That means that you have arranged a marketplace where you would buy a Call option for only $90, but the seller of that same option would somehow receive $110.  For added clarity, consider the following: What if, in your example, the future price ended up being $200? Then, you could exercise your call option, buying a share for $90, selling it for $200, making $110 profit. You would not exercise your put option, making your total profit $110. Now consider: What if, in your example, the future price ended up being $10? You would buy for $10, exercise your put option and sell for $110, making a profit of $100. You would not exercise your call option, making your total profit $100. This highlights that if your initial assumptions existed, you would earn money (at least $20, and at most, unlimited based on a skyrocketing price compared to your $90 put option) regardless of the future price. Therefore such a scenario would not exist in the initial pricing of the options. Now perhaps there is an initial fee involved with the options, where the buyer or seller pays extra money up-front, regardless of the future price. That is a different scenario, and gets into the actual nature of options, where investors will arrange multiple simultaneous transactions in order to limit risk and retain reward within a certain band of future prices.  As pointed out by @Nick R, this fee would be very significant, for a call option which had a price set below the current price. Typically, options are sold 'out of the money' initially, which means that at the current share price (at the time the option is purchased), executing the option would lose you money. If you purchase an 'in the money' option, the transaction cost initially would by higher than any apparent gain you might have by immediately executing the option. For a more realistic Options example, assume that it costs $15 initially to buy either the Call option, or the Put option. In that case, after buying both options as listed in your scenarios you would earn a profit if the share price exceeded $120 [The $120 sale price less the $90 call option = $30, which is your total fee initially], or dropped below $80 [The $110 Put price less the $80 purchase price = $30]. This type of transaction implies that you expect the price to either swing up, or swing down, but not fall within the band between $80-$120. Perhaps you might do this if there was an upcoming election or other known event, which might be a failure or success, and you think the market has not properly accounted for either scenario in advance. I will leave further discussion on that topic [arranging options of different prices to create specific bands of profitability / loss] to another answer (or other questions which likely already exist on this site, or in fact, other resources), because it gets more complicated after that point, and is outside the root of your question. A bullish (or 'long') call spread is actually two separate option trades.  The A/B notation is, respectively, the strike price of each trade. The first 'leg' of the strategy, corresponding to B, is the sale of a call option at a strike price of B (in this case $165).  The proceeds from this sale, after transaction costs, are generally used to offset the cost of the second 'leg'. The second 'leg' of the strategy, corresponding to A, is the purchase of a call option at a strike price of A (in this case $145). Now, the important part: the payoff.  You can visualize it as so. This is where it gets a teeny bit math-y.  Below, P is the profit of the strategy, K1 is the strike price of the long call, K2 is the strike price of the short call, T1 is the premium paid for the long call option at the time of purchase, T2 is the premium received for the short call at the time of sale, and S is the current price of the stock.  For simplicity's sake, we will assume that your position quantity is a single option contract and transaction costs are zero (which they are not). P = (T2 - max(0, S - K2)) + (max(0, S - K1) - T1) Concretely, let's plug in the strikes of the strategy Nathan proposes, and current prices (which I pulled from the screen).  You have: P = (1.85 - max(0, 142.50 - 165)) - (max(0, 142.50 - 145)) = -$7.80 If the stock goes to $150, the payoff is -$2.80, which isn't quite break even -- but it may have been at the time he was speaking on TV. If the stock goes to $165, the payoff is $12.20. Please do not neglect the cost of the trades!  Trading options can be pretty expensive depending on the broker.  Had I done this trade (quantity 1) at many popular brokers, I still would've been net negative PnL even if NFLX went to >= $165. "That's the way the markets work in THEORY. In actual fact, markets are subject to ""real world"" pressures. That is, there are so many things going on in the market that the end of the ""Lined In"" lock up is just one of many. To produce the result you describe, traders would have to hold cash in reserve for this so-called ""contingency"" to buy at the end of the lock-up. In most cases, they wouldn't want to because of everything else that is going on.  To use a real world analogy, would you want to wait until the last possible moment before going to the bathroom? Or would you go now while you had the chance? That's what the decision about ""holding cash in reserve for a contingency"" is like." In the money puts and calls are subject to automatic execution at expiration. Each broker has its own rules and process for this.  For example, I am long a put. The strike is $100. The stock trades at the close, that final friday for $90. I am out to lunch that day. Figuratively, of course. I wake up Saturday and am short 100 shares. I can only be short in a margin account. And similarly, if I own calls, I either need the full value of the stock (i.e. 100*strike price) or a margin account.  I am going to repeat the key point. Each broker has its own process for auto execution. But, yes, you really don't want a deep in the money option to expire with no transaction.  On the flip side, you don't want to wake up Monday to find they were bought out by Apple for $150. Absolutely.  There is no requirement that an option be in-the-money for you to close out a position.   Remember that there are alwayes two sides to a trade - a buyer and a seller.  When you bought your option, it's entirely possible that someone else was closing out their long position by selling it to you. "When you enter into a multi-legged trade where one is a buy and one is a sell, the limit is expressed as either: The gist is that you don't care what each individual piece costs; you only care what the cost of the bundle is. When you put on a buy-write, you are buying stock and selling a (covered) call against that stock.  That trade will always cost money. Putting on a buy-write will always be done at a net debit.  This is because is is normally impossible for a call to be worth more than its underlying stock price.  There are a few possible reasons there would be a""net credit"" option for what's described as a ""buy-write"":" (Note: I am omitting the currency units.  While I strongly suspect it's US$ I don't know from the chart.  The system works the same no matter what the currency.) A call or a put is the right to sell (put) or buy (call) shares at a certain price on a certain day. This is why you see a whole range of prices.  Not all possible stock values are represented, the number of possibilities has to be kept reasonable.  In this case the choices are even units, for an expensive stock they may be spaced even farther apart than this. The top of the chart says it's for June.  It's actually the third Friday in the month, June 15th in this case.  Thus these are bets on how the stock will move in the next 10 days. While the numbers are per share you can only trade options in lots of 100. The left side of the chart shows calls.  Suppose you sell a call at 19 (the top of the chart)  The last such trade would have gotten you a premium of 9.70 per share (the flip side of this is when the third friday rolls around it will most likely be exercised and they'll be paying you only 19 a share for a stock now trading at something over 26.)  Note the volume, bid and ask columns though--you're not going to get 9.70 for such a call as there is no buyer.  The most anybody is offering at present is 7.80 a share. Now, lets look farther down in the chart--say, a strike price of 30.  The last trade was only .10--people think it's very unlikely that FB will rise above 30 to make this option worthwhile and thus you get very little for being willing to sell at that price.  If FB stays at 26 the option will expire worthless and go away.  If it's up to 31 when the 15th rolls around they'll exercise the option, take your shares and pay you 30 for them.  Note that you already gave permission for the trade by selling the call, you can't back out later if it becomes a bad deal. Going over to the other side of the chart with the puts: Here the transaction goes the other way, come the 15th they have the option of selling you the shares for the strike price.  Lets look at the same values we did before.  19?  There's no trading, you can't do it. 30?  Here you will collect 3.20 for selling the put.  Come the 15th they have the right to sell you the stock for 30 a share.  If it's still 26 they're certainly going to do so, but if it's up to 31 it's worthless and you pocket the 3.20 Note that you will normally not be allowed to sell a call if you don't own the shares in question.  This is a safety measure as the risk in selling a call without the stock is infinite.  If the stock somehow zoomed up to 10,000 when the 15th rolls around you would have to come up with the shares and the only way you could get them is buy them on the open market--you would have to come up with a million dollars.  If there simply aren't enough shares available to cover the calls the result is catastrophic--whoever owns the shares simply gets to dictate terms to you.  (And in the days of old this sometimes happened.) "Number 2 cannot occur. You can buy the call back and sell the stock, but the broker won't force that #2 choice. To trade options, you must have a margin account. No matter how high the stock goes, once ""in the money"" the option isn't going to rise faster, so your margin % is not an issue.  And your example is a bit troublesome to me. Why would a $120 strike call spike to $22 with only a month left? You've made the full $20 on the stock rise and given up any gain after that. That's all. The call owner may exercise at any time. Edit: @jaydles is right, there are circumstances where an option price can increase faster than the stock price. Options pricing generally follows the Black-Scholes model. Since the OP gave us the current stock price, option strike price, and time to expiration, and we know the risk free rate is <1%, you can use the calculator to change volatility. The number two scenario won't occur, however, because a covered call has no risk to the broker, they won't force you to buy the option back, and the option buyer has no motive to exercise it as the entire option value is time premium." Here's a simple example for a put, from both sides. Assume XYZ stock trades at $200 right now.  Let's say John writes a $190 out of the money put on XYZ stock and sells this put to Abby for the premium, which is say $5. Assume the strike date, or date of settlement, is 6 months from now.  Thus Abby is long one put option and John is short one put option (the writer of the option is short the option). On settlement date, let's assume two different scenarios: (1) If the price of the stock decreases by $50, then the put that Abby bought is 'in the money'. Abby's profit can be calculated as being strike price 190 - current stock price 150 - premium paid 5 = $35 So not including any transaction fees, that is a $35 dollar return on a $5 investment. (2) If the price of the stock increases by $50, then the put that Abby bought is worthless and her loss was 100%, or her entire $5 premium.  For John, he made $5 in 6 months (in reality you need collateral and good credit to be able to write sizable option positions). "Yes, and the math that tells you when is called the Kelly Criterion. The Kelly Criterion is on its face about how much you should bet on a positive-sum game. Imagine you have a game where you flip a coin, and if heads you are given 3 times your bet, and if tails you lose your bet.  Naively you'd think ""great, I should play, and bet every dollar I have!"" -- after all, it has a 50% average return on investment.  You get back on average 1.5$ for every dollar you bet, so every dollar you don't bet is a 0.5$ loss. But if you do this and you play every day for 10 years, you'll almost always end up bankrupt.  Funny that. On the other hand, if you bet nothing, you are losing out on a great investment.  So under certain assumptions, you neither want to bet everything, nor do you want to bet nothing (assuming you can repeat the bet almost indefinitely). The question then becomes, what percentage of your bankroll should you bet? Kelly Criterion answers this question.  The typical Kelly Criterion case is where we are making a bet with positive returns, not an insurance against loss; but with a bit of mathematical trickery, we can use it to determine how much you should spend on insuring against loss. An ""easy"" way to undertand the Kelly Criterion is that you want to maximize the logarithm of your worth in a given period.  Such a maximization results in the largest long-term value in some sense. Let us give it a try in an insurance case. Suppose you have a 1 million dollar asset.  It has a 1% chance per year of being destroyed by some random event (flood, fire, taxes, pitchforks). You can buy insurance against this for 2% of its value per year.  It even covers pitchforks. On its face this looks like a bad deal.  Your expected loss is only 1%, but the cost to hide the loss is 2%? If this is your only asset, then the loss makes your net worth 0.  The log of zero is negative infinity.  Under Kelly, any insurance (no matter how inefficient) is worth it.  This is a bit of an extreme case, and we'll cover why it doesn't apply even when it seems like it does elsewhere. Now suppose you have 1 million dollars in other assets.  In the insured case, we always end the year with 1.98 million dollars, regardless of if the disaster happens.  In the non-insured case, 99% of the time we have 2 million dollars, and 1% of the time we have 1 million dollars. We want to maximize the expected log value of our worth.  We have log(2 million - 20,000) (the insured case) vs 1% * log(1 million) + 99% * log(2 million). Or 13.7953 vs 14.49.  The Kelly Criterion says insurance is worth it; note that you could ""afford"" to replace your home, but because it makes up so much of your net worth, Kelly says the ""hit it too painful"" and you should just pay for insurance. Now suppose you are worth 1 billion.  We have log(1 billion - 20k) on the insured side, and 1%*log(999 million) + 99% * log(1 billion) on the uninsured side. The logs of each side are 21.42 vs 20.72.  (Note that the base of the logarithm doesn't matter; so long as you use the same base on each side). According to Kelly, we have found a case where insurance isn't worth it. The Kelly Criterion roughly tells you ""if I took this bet every (period of time), would I be on average richer after (many repeats of this bet) than if I didn't take this bet?""  When the answer is ""no"", it implies self-insurance is more efficient than using external insurance.  The answer is going to be sensitive to the profit margin of the insurance product you are buying, and the size of the asset relative to your total wealth. Now, the Kelly Criterion can easily be misapplied.  Being worth financially zero in current assets can easily ignore non-financial assets (like your ability to work, or friends, or whatever).  And it presumes repeat to infinity, and people tend not to live that long. But it is a good starting spot. Note that the option of bankruptcy can easily make insurance not ""worth it"" for people far poorer; this is one of the reasons why banks insist you have insurance on your proprety. You can use Kelly to calculate how much insurance you should purchase at a given profit margin for the insurance company given your net worth and the risk involved.  This can be used in Finance to work out how much you should hedge your bets in an investment as well; in effect, it quantifies how having money makes it easier to make money."