If you have an option, there are three categories it can belong to at any given time: in-the-money, out-of-the-money, or at-the-money.
Let's take a quick step back. Options provide the right, but not the obligation, to buy or sell some underlying asset (like a stock, commodity, or currency) at a pre-set price at a prearranged time in the future. The pre-set price is known as the "strike price." The relationship between the strike price and the current price of the underlying asset determines whether the option is "in," "at," or "out" of the money.
You have a call option for MSFT with a strike price of $140, with a September expiration (which is two months from now). That option gives you the ability to buy shares of MSFT at a price of $140 in September. So if MSFT is trading at $135 at the September expiration, you are out-of-the-money. You'd rather buy the shares on the open market, so your option is useless. You would let it expire without exercising it.
However, if MSFT is trading at $145, you are in-the-money. You can exercise your option, buy shares at $140...and then instantly sell them for $145 on the open market. You book a profit of $5 a share (minus whatever the option cost you).
The last situation comes when the option strike price and the trading price are the same; MSFT is trading right at $140. Here, your option is at-the-money.
Now let's get to the concept of volatility skew. Volatility skew measures the difference in implied volatility between the three possible phases of your option. It compares implied volatility for out-of-the-money options with that for in-the-money options with that for at-the-money options.
In structure, it's similar to a yield curve, only in this case it deals with implied volatility rather than rates on various bonds. A yield curve shows the difference between the return of similar bonds with different maturities. How much can you get for a 1-year bond vs. a 5-year bond vs. a 30-year bond? That question underlies the concept of a yield curve. Along the same lines, the volatility skew plots out the various implied volatilities that come with the different possible results for your options.
You're planning to buy a call for MSFT. You can choose between a number of strike prices (kind of like picking from a menu). All the options have the same expiration, but they have different strike prices. You've got strike prices that are-at-the-money. You've got ones that are already in-the-money. You've got ones that are already out-of-the-money. Each of these possibilities comes with a different price (the in-the-money options are more expensive than the out-of-the-money ones).
When trying to determine which makes the most sense for your particular strategy, you can look at the volatility skew between them. It helps put the different possible strike prices into context.
Related or Semi-related Video
Finance: What is the U.S. Mint?4 Views
Finance allah shmoop what is the u S mint It's
this tasty sweet smelling plant that can be grown in
the united states So it's you know us mint But
it's not the u S Mint that would be this
place and these three places actually yeah there are currently
for mints in use one each in philly san francisco
denver in a west point So what exactly do they
do there Take mint plants and convert them into delicious
melt in your mouth treats so we can cleanse our
palace after a hefty meal at our favorite garlic filled
italian restaurant Well no not quite The u S Mint
is responsible for one hundred percent of our coinage That's
pennies nickels dimes quarters of this one Whoever that busty
woman is if it can be found in a change
purse It started out here or here or here or
here Well the u S Mint was created by congress
in seventeen ninety two when our forefathers realized that there
was no way to make any of the jukebox is
work So yeah we needed small change because well back
in their day pretty much the only thing that cost
over ninety nine cents was a thirty foot yacht or
a trip around the world on a mule so we
needed something other than paper currency that started at a
dollar And while the u S Mint was born well
the mints use precious ish medals but not so precious
that they're not willing to melt them and crush them
and form them into likenesses of dead presidents Well the
medals are fed through a series of fancy machines until
coins pop out on the other end Well typically the
quarters and dimes and so on that we use on
a semi regular basis but sometimes also commemorative coins Yeah
that's included in there too Well like when the country
turns two hundred years old when we want to recognize
an important person or event from history or when you
know workers that the men are bored of coining aeneas
Now this is all what they do Additionally there's a
facility at fort knox where all of the u S
Bullion is stored and no gold and silver bullion not
bullion Birbal yang's you difference in french but don't get
any crazy ideas about robbing the place That would be
like while trying to break into fort knox common misconception
the mint doesn't print paper currency that would be under
the purview of the bureau of engraving and printing which
will also put your loved one's name on a champagne
flute for just twenty nine ninety five So yeah the
u S mint does coins The bureau does dolla dolla
bills right Those annual crosstown softball cames really gotten pretty 00:02:31.958 --> [endTime] fierce
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