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.
Important Disclaimer :
Options involve risk and are not suitable for all investors.
Data and information is provided for informational purposes only, and is not intended for trading purposes. Neither optiontradingpedia.com, mastersoequity.com nor any of its data or content providers shall be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. Data is deemed accurate but is not warranted or guaranteed. optiontradinpedia.com and mastersoequity.com are not a registered broker-dealer and does not endorse or recommend the services of any brokerage company. The brokerage company you select is solely responsible for its services to you. By accessing, viewing, or using this site in any way, you agree to be bound by the above conditions and disclaimers found on this site.
Copyright Warning :
All contents and information presented here in optiontradingpedia.com are property of Optiontradingpedia.com and are not to be
copied, redistributed or downloaded in any ways unless in accordance with our
We have a comprehensive system to detect
plagiarism and will take legal action against any individuals, websites or companies involved. We Take Our Copyright VERY Seriously!
Site Authored by Jason NG aka Mr. OppiE