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Options Moneyness

What is Options Moneyness? What is In The money, at the money, out of the money?



Options Moneyness - Definition


The relationship between the strike price of an option with the price of the underlying asset.


What Is Options Moneyness?


Options Moneyness is definitely the most important stock options concept in option trading. It describes the relationship between options strike price and the price of the underlying asset and determines if intrinsic value exists in an option. Moneyness is described using one of the 3 states; In The Money (ITM), At The Money (ATM) or Out Of The Money (OTM). As the price of the underlying asset changes, an option moves from one moneyness state to another, affecting the value of your option trading position upon expiration.




Why Is Options Moneyness Important?


Understanding options moneyness allows an option trader to choose the correct options for the correct option trading situation. If a dramatic move on the underlying asset is expected in the short run, Out Of The Money Options would maximize option trading profits. If a moderately small move is expected, In The Money options would be sensitive enough to capitalize on those small moves. Furthermore, understanding options moneyness allows an assessment of the risk to your option trading positions to be made. As expiration approaches, Out Of The Money options become increasingly prone to expiring worthless. On top of that, the 3 states of options moneyness is the most common jargon in the option trading community and you definitely need to understand them as an options trader. In fact, options moneyness directly affects the delta value of stock options which determines the profitability of options.


In The Money (ITM )


In the money is the state of options moneyness where intrinsic value exists in an option. Call Options are In The Money when its strike price is lower than the price of the underlying asset and Put Options are In The Money when its strike price is higher than the price of the underlying asset. Read More About In The Money Options.



At The Money (ATM)


At the money is the state of options moneyness where the strike price of an option is equal to the price of the underlying asset. Read More About At The Money Options.



Out Of The Money (OTM)


Out of the money is the state of options moneyness where no intrinsic value exists and that the price of an option consists only of extrinsic value. A call option is Out Of The Money when its strike price is higher than the price of the underlying asset and a put option is Out Of The Money when its strike price is lower than the price of the underlying asset. Read More About Out Of The Money Options.



Near The Money (NTM)


Near the money options is not one of the three official options moneyness states and is used to refer to options with strike prices near the spot price of the underlying stock. This term is also used in cases where there are no At The Money Options due to the spot price of the underlying stock being in between two strike prices. Read More About Near The Money Options.


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