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Derivative Engines - Options Handbook
Introduction
Definition
Call / Put
Strike Price
Volatility
Implied Volatility
Pricing Options
Greeks
Delta Hedging
Volatility Trading
Currency Options
Moneyness
Strike vs Volatility
25 Delta BF & RR
Volatility Matrix
Option Types
Vanilla Options
Barrier Options
Knock In
Knock Out
Double Knock In
Double Knock Out
Knock In - Knock Out
Window Barrier Options
Binary Options
One Touch
No Touch
Double No Touch
Double One Touch
European Digital
European Digital Range
Range Accrual Options
Moneyness
Moneyness is a term which is describing the relationship between the
strike price
of an
option
and the fair
market price
at the expiry date according to current prices. In other words the fair market price at the expiry is date is the forward rate.
Options can be classified in three types according to their moneyness; In the money, Out of the money, At the money.
For currency options at the money price can be defined in three different ways.
1)At the money spot: At the money level is accepted as the current spot price and the moneyness of the option is calculated by using this level.
2)At the money forward: At the money level is accepted as the current forward price and the moneyness of the option is calculated by using this level
3)At the money delta: At the money level is accepted as the price level where the value of the
Call
option equals to the value of the
Put
option. In other words the price level where Delta of the option is % 50.
At the money:
A call option is at the money when the strike price equals to the At the Money level. A put option is at the money when the strike price equals to the At the Money level.
At the money options has only the time value and no intrinsic value.
In the money:
A call option is in the money when the strike price is lower than the At the Money level. A put option is in the money when the strike price is higher than the At the Money level. Since in the money options has significant amount of intrinsic value on top of their time values, these options are quite expensive.
Out of the money:
A call option is out of the money when the strike price is higer than the At the Money level. A put option is out of the money when the strike price is lower than the At the Money level. Out of the money options has only the time value and no intrinsic value. Since the probability to be in the money at the expiry that is lower for out of the money options, their premiums are lower than the in the money options.
Amount of the moneyness is measured by the
delta
of an option. Delta of an option is between % 0 to % 100. An at the money option’s delta is % 50. If delta decreases the option becomes more out of the money and if delta increases the option becomes more in the money. If delta of an option is less than % 50 then the option is out of the money. If delta of an option is greater than % 50 then the option is in the money.
Derivative Engines is a Real Time option calculator. Please see the online option pricers below.
Options
Structured Products
Vanilla Options
Dual Currency Deposit
Multiple Options Portfolio
Asymetric Forward
Knock In Barrier Options
Zero Cost Collar
Knock Out Barrier Options
Seagull (3 Way Collar)