Moneyness

Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security. In options trading, terms such as in-the-money, out-of-the-money and at-the-money describe the moneyness of options.

In-the-Money (ITM)

A call option is in-the-money when its strike price is below the current trading price of the underlying asset.

A put option is in-the-money when its strike price is above the current trading price of the underlying asset.

In-the-money options are generally more expensive as their premiums consist of significant intrinsic value on top of their time value.

Out-of-the-Money (OTM)

Calls are out-of-the-money when their strike price is above the market price of the underlying asset.

Puts are out-of-the-money when their strike price is below the market price of the underlying asset.

Out-of-the-money options have zero intrinsic value. Their entire premium is composed of only time value. Out-of-the-money options are cheaper than in-the-money options as they possess greater likelihood of expiring worthless.

At-the-Money (ATM)

An at-the-money option is a call or put option that has a strike price that is equal to the market price of the underlying asset. Like OTM options, ATM options possess no intrinsic value and contain only time value which is greatly influenced by the volatility of the underlying security and the passage of time.

Often, it is not easy to find an option with a strike price that is exactly equal to the market price of the underlying. Hence, close-to-the-money or near-the-money options are bought or sold instead.

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