O,apter 1: Definitions 7 
the last trading day; the holder does not have to wait until the expiration date 
itself before exercising. (Note: Some options, called "European" exercise 
options, can be exercised only on their expiration date and not before - but they 
are generally not stock options.) These exercise notices are irrevocable; once 
generated, they cannot be recalled. In practical terms, they are processed only 
once a day, after the market closes. Whenever a holder exercises an option, 
somewhere a writer is assigned the obligation to fulfill the terms of the option 
contract: Thus, if a call holder exercises the right to buy, a call writer is assigned 
the obligation to sell; conversely, if a put holder exercises the right to sell, a put 
writer is assigned the obligation to buy. A more detailed description of the exer­
cise and assignment of call options follows later in this chapter; put option exer­
cise and assignment are discussed later in the book. 
RELATIONSHIP OF THE OPTION PRICE AND STOCK PRICE 
In- and Out-of-the-Money. Certain terms describe the relationship between 
the stock price and the option's striking price. A call option is said to be out-of-the­
money if the stock is selling below the striking price of the option. A call option is in­
the-money if the stock price is above the striking price of the option. (Put options 
work in a converse manner, which is described later.) 
Example: XYZ stock is trading at $47 per share. The XYZ July 50 call option is out­
of-the-money, just like the XYZ October 50 call and the XYZ July 60 call. However, 
the XYZ July 45 call, XYZ October 40, and XYZ January 35 are in-the-money. 
The intrinsic value of an in-the-money call is the amount by which the stock 
price exceeds the striking price. If the call is out-of-the-money, its intrinsic value is 
zero. The price that an option sells for is commonly referred to as the premium. The 
premium is distinctly different from the time value premium ( called time premium, 
for short), which is the amount by which the option premium itself exceeds its intrin­
sic value. The time value premium is quickly computed by the following formula for 
an in-the-money call option: 
Call time value premium = Call option price + Striking price - Stock price 
Example: XYZ is trading at 48, and XYZ July 45 call is at 4. The premium - the total 
price - of the option is 4. With XYZ at 48 and the striking price of the option at 45, 
the in-the-money amount (or intrinsic value) is 3 points (48-45), and the time value 
isl(4-3).