Option Fundamentals   • 13
4. The arrow at the top of the shaded region in the figure indicates 
that our exposure extends infinitely upward. If, for some reason, 
this stock suddenly jumped not from $50 to $60 per share but 
from $50 to $1,234 per share, we would have profitable exposure 
to all that upside.
5. Clearly, the diagram showing a purchased call option looks a great deal 
like the top of the diagram for a purchased stock. Look back at the top 
of the stock purchase figure and compare it with the preceding figure: 
the inherent directionality of options should be completely obvious.
Any time you see a green region on diagrams like this, you should 
take it to mean that an investor has the potential to realize a gain on the 
investment and that the investor has gained exposure. Any time an option 
investor gains exposure, he or she must pay up front for that potential gain. 
The money one pays up front for an option is called premium (just like the 
fee you pay for insurance coverage).
In the preceding diagram, then, we have gained exposure to a range 
of the stock’s upside potential by buying a call option (also known as a long 
call). If the stock moves into this range before or at option expiration, we 
have the right to buy the stock at our $60 strike price (this is termed exer -
cising an option) or simply sell the option in the option market. It is almost 
always the wrong thing to exercise an option for reasons we discuss shortly.
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If, instead, the stock is trading below our strike price at expiration, the 
option is obviously worthless—we owned the right to an upside scenario 
that did not materialize, so our ownership right is worth nothing.
It turns out that there is special jargon that is used to describe the 
relationship between the stock price and the range of option exposure:
Jargon Situation
In the money (ITM) Stock price is within the option’s range of exposure
Out of the money (OTM) Stock price is outside the option’s range of exposure
At the money (ATM) Stock price is just at the border of the option’s range of 
exposure
Each of these situations is said to describe the moneyness of the option. 
Graphically, moneyness can be represented by the following diagram: