Trading the EURUSD on August 9, 2013 22 ITM

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Determining a Buy Call Option’s Moneyness

Now that you are comfortable calculating “Profit/Loss at expiry” to buy options, I would like to show you how changing the strike of the option affects the overall value of it. The strike of an option will always be in one of three states: In-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

Since there are several news events for both the euro and the greenback on Monday, EUR/USD will be potentially more volatile. When buying options, increasing volatility in the future is good. So let’s evaluate whether you would want to buy your options at-the-money, in-the-money, or out-of-the-money (terms you will frequently hear when trading options).

• An option is at-the-money (ATM) when the strike rate equals the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call option with strike 1.1200 the option is ATM.

• An option is in-the-money (ITM) when the strike rate is better than the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call with strike 1.1100 the option would be considered ITM because 1.1100 is a better buy rate than 1.1200.

• An option is out-of-the-money (OTM) when the strike rate is worse than the underlying market rate. For example, if EUR/USD is trading at 1.1200 and you buy a Call with strike 1.1300 the option would be considered OTM because 1.1300 is a worse buy rate than 1.1200.

These states are known as an option’s ‘moneyness’.

When an option is in-the-money (ITM), it is more valuable, i.e. its premium is higher. Hence, ITM options are the most expensive to buy, whereas out-of-the-money (OTM) options are cheaper. Paying more for an option means you are risking more, however an ITM option has a higher probability of returning a profit. Buying an OTM option is a smaller risk, but the probability of profit is lower. In each trade, you enter a strike rate depending on your market outlook and risk appetite.

Buying an at-the-money (ATM) Call option

When you buy a Call option with a strike equal to the market rate, it is at-the-money (ATM). If the market rises, the option will become ITM since the buy price of the strike is cheaper than the market. But if the market falls, the option will become OTM. The diagram below demonstrates this concept.

Example of buying Long Call option – ATM, OTM, ITM

The following three images depict EUR/USD buy call options ATM, OTM, and ITM.

In the ATM buy call option image above, the underlying EUR/USD rate was trading at 1.12252 and valued at 345.47 USD.
Setting an option with a strike of 0% means the strike will also be 1.12252.

In the OTM buy call option above, a strike price +2% above market has been selected. This means the trader is reserving a worse rate than what is currently available in the market and the following happens – the value of the option decreases to 54.50 USD.

In the ITM buy call option above, a strike price -2% below market has been selected. This means the trader is reserving a better rate than the market and the following happens – the value of the option increases to 1,190.11 USD.

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Note: A Put option, with the same strike rate, will always be in a different state to the Call option unless the strike rate equals the market, then both the Put and Call will be at-the-money (ATM). The table below shows the different states of a Put and Call as the strike level in relation to market level changes.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Forex – Dollar Extends Losses as Rate Premium Withers; U.S. Payrolls Eyed

By Geoffrey Smith

Investing.com — The dollar extended its slide in early trading in Europe on Friday, as the prospect of collapsing U.S. interest rates continued to erode its appeal vis-à-vis its peers.

Relatively high nominal returns on dollar assets, whether bonds or stocks, have been the key to the dollar’s strength over the last couple of years. But with the U.S. equity market in retreat and bond yields collapsing under the expectation of further interest rate cuts from the Federal Reserve, that argument no longer holds. The release of the U.S. labor market report later, which is expected to show a clear slowdown in hiring last month, is unlikely to change much in that regard.

By 2:50 AM ET (7:50 GMT), the dollar index that tracks the greenback against a basket of developed market currencies was down 0.3% at a two-month low of 96.520, on course for a decline of 1.6% for the week.

Its biggest losses were against the kiwi , which rebounded 0.5% amid tentative signs that the Chinese economy is picking itself off the floor. However, it also fell against the safe haven yen and Swiss franc.

USD/JPY fell below 106 for the first time since August during Asian trading and was down 0.2% at 105.89. Zach Pandl, the Goldman Sachs’s co-head of global foreign exchange and emerging market strategy, told Bloomberg TV that the yen could rally as far as 95 if global markets stay disorderly for the next couple of months. USD/CHF fell 0.1% to 0.9443.

The euro also hit its highest against the dollar since August, amid concerns that the European Central Bank can’t do anything to stop the differential between euro and dollar interest rates falling further. The ECB’s governing council meets next week, against a backdrop of expectations that are limited to a 10 basis-point cut in the deposit rate and some tweaking of the bank’s long-term refinancing operations.

The ECB is likely to ‘look through’ a surprisingly strong rise in German factory orders in January, which predated the scare over the coronavirus and in any case owed much to volatile elements such as aerospace.

EUR/USD rose as high as $1.1249 before retracing to $1.1234, roughly flat from late Thursday but still up nearly 1.9% this week.

The weak tone in the dollar also helped sterling to its highest level in a week, ahead of the government’s annual budget next week. Sterling has been supported by promises of big increases in public spending that would – all other things being equal – have removed the need for further interest rate cuts from the Bank of England. Analysts at Pantheon Macroeconomics expect a relatively modest widening of the fiscal deficit to 2.4% of gross domestic product from 2.0% in the current fiscal year.

“We expect the Chancellor to be relatively cautious this year, in order to preserve his firepower for 2021, when the economic costs of Brexit will seriously start to mount,” said Pantheon analyst Samuel Toombes. GBP/USD was up 0.2% at $1.2974.

Dollar surrenders to euro and yen as rate supremacy ends

SYDNEY (Reuters) – The dollar nursed savage losses against the yen and euro on Friday as a plunge in U.S. yields to record lows wiped out the currency’s single greatest attraction for investors – higher interest rates.

Mounting fears over the fallout from the coronavirus has driven a truly tectonic shift in expectations for U.S. rates as markets wager the Federal Reserve will have to cut rates by 50 basis points for a second time this month.

The resulting collapse in Treasury yields has been the death of one of the most popular carry trades globally – borrowing at negative rates in the euro and yen to buy U.S. assets.

“Select USD pairs like EUR/USD are turning because of a dramatic and decisive shift in U.S. rate expectations and related spreads,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank (DE: DBKGn ).

“The USD has lost the single most important source of its over-valuation, a strong carry advantage,” he added, warning this could end a dollar uptrend that has lasted since mid-2020.

In particular, were the euro to close above the December peak of $1.1239, it would breach a down channel from August 2020 and signal a clear break of the bull trend.

The single currency was almost there, being up at $1.1226 ( EUR= ) on Friday having surged 0.9% overnight and a world away from the February trough of $1.0775. It was already up 1.9% for the week which would be the largest such gain since June 2020.

There were lots of other miserable milestones, with the dollar sinking to a six-month low on the yen at 105.96 having shed 1.2% overnight. The next bear targets were 105.72 and 104.44, lows from August and September last year.

It also sank to a two-year trough against the Swiss franc at 0.9443 francs , and was down 2% for the week so far.

The yen, euro and Swiss franc are backed by countries that run strong external surpluses, while Japan has the added advantage of being the world’s largest creditor nation.

Those safe-haven attributes had grown in importance as U.S. 10-year yields ( US10YT=RR ) tumbled to just 0.91%, a drop of 66 basis points in just 11 sessions.

Fed fund futures were also pricing in more than 80 basis points of further easing by year end.

Yet the dollar was not down and out everywhere, as it still held safe haven status compared to emerging market currencies and those exposed to commodities.

That left it holding gains on the Canadian , Australian and New Zealand dollars , along with a raft of currencies across Asia.

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