[Fegu]

Options are extremely versatile. They can be used as a type of insurance contract to reduce exposure to a certain event, to gain exposure to an event, or as a mechanism to establish a position on future FX rate movements.

Some Terminology

Call - The right to buy
Put - The right to sell
Strike - The rate at which the holder of the option has the right to buy/sell
Expiry date - The date the option lapses
Cut-off time - The time of day on the expiry date by which time the holder of the option must exercise (i.e. action) the option
European style - May only be exercised on the expiry date
American style - May be exercised at any time up to and including the expiry date
Premium - The cost of the option

The Money-ness of an Option Strike
The money-ness of an option is a measure of its intrinsic value. Options are considered to be In-The-Money (ITM) if they can be exercised for a profit, i.e. if it is more advantageous to deal at the option’s strike rate rather than at the outright forward rate (the expected market rate at expiry). Out-The-Money (OTM) describes options that are unlikely to be exercised at maturity, as it is less advantageous to deal at the strike rate than the outright forward rate. At-The-Money (ATM) refers to options where strike is close to the outright forward rate for the tenor of the option. It is important to note that various definitions for ATM exist, which are all very common:

–ATM (Delta neutral) – the strike at which the Delta of the Call and the Put Option offset each other.
–At-The-Money Spot (ATMS) – where the strike is equal to the current market rate (spot).
–At-The-Money Forward (ATMF) – where strike equals that of the outright forward with the same expiry date.