- If exercise price = current stock price, the option is "at the money" call.
- If exercise price > current stock price, the option is "out of the money" call.
- If exercise price < current stock price, the option is "in the money" call, as the bearer can purchase the stock at the lower exercise price and sell at the higher current stock price.
Buyers of call options are betting that the stock price will be higher than the exercise price by the expiration date. The seller, or writer, or the call option bets that the stock price will fall below the exercise price. For put options, it's the opposite. Those who buy put options bet that the stock price will fall, so profit can be made by buying the security at the lower price and selling at the higher exercise price. On the other hand, writers of put options bet that the stock price will increase.
Numerous factors go into how options are priced. If the price of the underlying security increases, so will the price of call options given a fixed exercise price. This is because there will be a greater range such that the option will be "in the money." By similar arguments, the lower the exercise price, the higher the value and price of the option. The results are opposite for put options in these cases. However, if volatility of the underlying security increases, so will the value of both call and put options. This is because the downside loss is fixed; bearers of options do not need to buy or purchase the asset if the price is unfavorable. Potential upside, on the other hand, increases the value of the option. Similarly, time to expiration increases the value of both options. Finally, rising interest rates depress the present value of exercise price and makes the call option more valuable. Dividends depress the expected capital gain of stocks and the value of the call option.
