Moneyness
Moneyness is a description of a derivative relating its strike price to the price of its underlying asset. If the current price of XYZ stock is $50, a call or put option with a strike price of $50 would be at the money. A put with a strike price of $75 would be in the money because it would allow the holder of the put to sell the stock for a higher price than it is currently trading. Moneyness can be measured with respect to the underlying stock or other asset's current/spot price or its future price. On the other hand, a call with a strike price of $75 would be out of the money because there is no reason the holder of a call would want the opportunity to purchase XYZ stock for $75 when they could get it on the open market for $50.
What is Moneyness?
Moneyness is a description of a derivative relating its strike price to the price of its underlying asset. Moneyness describes the intrinsic value of an option in its current state. The term moneyness is most commonly used with put and call options and is an indicator as to whether the option would make money if it were exercised immediately. Moneyness can be measured with respect to the underlying stock or other asset's current/spot price or its future price.
Breaking Down Moneyness
Moneyness tells option holders whether exercising will lead to a profit. There are many forms of moneyness, including in, out or at the money. Moneyness looks at the value of an option if you were to exercise it right away. A loss would signify the option is out of the money, while a gain would mean it's in the money. At the money means that you will break even upon exercising the option.
Example of Moneyness
If the current price of XYZ stock is $50, a call or put option with a strike price of $50 would be at the money. Exercising the option would result in a breakeven for the investor. A put with a strike price of $75 would be in the money because it would allow the holder of the put to sell the stock for a higher price than it is currently trading. On the other hand, a call with a strike price of $75 would be out of the money because there is no reason the holder of a call would want the opportunity to purchase XYZ stock for $75 when they could get it on the open market for $50.
Related terms:
At The Money (ATM)
At the money (ATM) is a situation where an option's strike price is identical to the price of the underlying security. read more
Deep Out of the Money
An option is deep out of the money if its strike price is significantly above (call) or below (put) the current price of the underlying asset. read more
Forward Start Option
A forward start option is an exotic option that is bought and paid for now but becomes active later with a strike price determined at that time. read more
In The Money (ITM)
In the money (ITM) means that an option has value or its strike price is favorable as compared to the prevailing market price of the underlying asset. read more
Intrinsic Value : How Is It Determined?
Intrinsic value is the perceived or calculated value of an asset, investment, or a company and is used in fundamental analysis and the options markets. read more
Near the Money
The expression "Near the money" refers to an options contract whose strike price is close to the current market price of the corresponding underlying security. read more
Options
Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period. read more
Out of the Money (OTM)
An out of the money (OTM) option has no intrinsic value, but only possesses extrinsic or time value. OTM options are less expensive than in the money options. read more