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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