Option Strike Touches and Moneyness
Summary
An option is at the money when the underlying price equals its strike. A regular option can move into and out of this state repeatedly during its life, so touching the strike is a temporary price event rather than a lasting status. This clarifies the distinction between moneyness, which depends on the current underlying price relative to the strike, and the event of reaching that price level.
The document also mentions probability of touch, a measure of whether the underlying reaches or crosses the strike at any point before expiration. It reports a common approximation that this probability is about twice the probability of expiring in the money, but gives no derivation or conditions for that relationship. Touch terminology is especially consequential for barrier options, where reaching a specified level can trigger a payoff; the discussion does not develop such contracts or quantify touch probabilities.
Key ideas
- A call is at the money when the underlying price equals its strike, and a put is at the money under the same equality.
- A regular option can touch its strike multiple times during its life.
- Probability of touch concerns reaching or crossing a strike before expiration, not just the terminal price.
- Barrier options may use touching a level as a payoff trigger.
- The cited approximate relationship between touch and expiration probabilities is not derived or qualified.
Tags
Full text
# Is Touching the same thing as At The Money? # Is Touching the same thing as At The Money? Zvi Bodie, Alex Kane, Alan J. Marcus's Investments (2018 11 edn). p 659. > An option is described as in the money when its exercise would produce a positive cash flow. Therefore, a call option is in the money when the asset price is greater than the exercise price, and a put option is in the money when the asset price is less than the exercise price. Conversely, a call is out of the money when the asset price is less than the exercise price; no one would exercise the right to purchase for the strike price an asset worth less than that amount. A put option is out of the money when the exercise price is less than the asset price. Options are at the money when the exercise price and asset price are equal. Once the stock price touches the option's strike price, then the option becomes at the money. I can't find this term "Touch" in Bodie or Hull's Options, Futures, and Other Derivatives (2017 10 edn). Probability of Touch Explained > Probability of Touch (POT) Probability of touch is a measurement that gives us a rough idea of the probability of our strike being touched, or breached, by the stock price anytime during the trade’s lifetime. We have found that probability of touch works out to be around two times the probability of the option expiring in the money. Options Trading Probabilities Explained - POP vs ITM vs OTM vs P50 vs Touch... | Trade Options With Me > The probability of touch shows the probability that the price of the underlying will touch (or breach) the strike price. Usually, the probability of breach is about 2x the probability of ITM. ## Answer by user24980 (score 0, accepted) https://quant.stackexchange.com/a/54192 not exactly, "touching" is relevant in the case of barrier options, where the payoff is triggered if the price touches a certain level, once. Regular options can touch the strike and be at the money several times throughout their lives.
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