What Are Near The Money Options (NTM)?

: Summary


Near The Money Options Definition


Stock Options whose strike price is near the prevailing price of the underlying stock.


Near The Money Options Introduction


Near The Money Options (NTM) refers to options with strike prices which are near to the prevailing price of the underlying stock. Near The Money isn't one of the three options moneyness states but is used extremely often as a replacement for "At The Money Options" due to the fact that it is extremely rare for the spot price to be exactly equal to the strike price of an option. Indeed, Near The Money Options are used most often as replacements for At The Money Options.

This tutorial shall explore what Near The Money Options are and how they are traded.

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What Are Near The Money Options?


Near The Money Options are options with strike prices near to the spot price of the underlying stock and options with strike prices nearest to the spot price of the underlying stock are known as "Nearest The Money Options". Typically, near the money options refer to a range of strike prices near the spot price of the underlying stock. Sometimes in options trading, Nearest The Money Options are referred to as Near the Money Options as well.

For example, if QQQ is trading at $50.70, it's $51 strike price call and put options are Nearest The Money as their strike price is nearest the spot price of QQQ. Indeed, Nearest The Money Options are always either slightly In The Money or Slightly Out Of The Money. In this example, the $51 strike price nearest the money call options are slightly out of the money and the $51 strike price near the money put options are slightly in the money.

The options chain below displays near the money options for QQQ with the nearest the money strike price highlighted.

Near The Money Options


As such, Near the Money options could contain only extrinsic value if it is slightly out of the money or both intrinsic value and extrinsic value if it is slightly in the money. Indeed, near the money options are the only kind of options that could be both in the money or out of the money.



Near The Money Options Versus At The Money Options


First of all, it must be stated that it is extremely rare for options to be exactly At The Money, as such, you will almost always be using Near The Money options whenever you trade At The Money Options.

At The Money Options have delta value of 0.5 (-0.5 for put options), indicating an equal chance of ending up in the money or out of the money by expiration. Near the money options however may have delta value higher (if they are in the money) or lower (if they are out of the money). The nearer to the spot price of the underlying stock, the closer to 0.5 the delta value of the near the money option becomes.





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