Option Education

[clevertechie]

Questions about - In the Money, Out of the Money, At the Money

Hi everybody,

I'm new to options trading, I just started learning about it a week ago.

Could someone please explain in what scenario the ITM, OTM, ATM actually takes effect?

What I mean is....

If SPY is currently trading at 179 and I buy 1 contract CALL at 185 strike for $1.79 - this option would be out of the money, yet from what I understand the options profit is made when the price of the actual contract goes up.

So, say SPY went to 182 (+3) and the price of the contract went up to $4.79 (+3) (assuming delta is 1) and I close the option - $4.79 - $1.79 = $3.79 * 100 = $370 profit.

Is this correct? So even though the option is still considered out of the money at 182 compared to where I bought it for 185.

If this is correct then the term out of the money is confusing to me...Does this only apply when the option is exercised or am I completely misunderstanding it?

Please help.

Thank you!