6 Quick Examples To Mastering Option Moneyness
Kirk Du Plessis | Jan 30, 2012 08:22AM ET
The moneyness on a single option contract is a fundamental concept to master when trading. I’d even say it’s a requirement before you put real money into the market that you completely understand these relationships. It only gets more difficult as you add complex options strategies.
Because of an option’s moneyness, the option can be distinguished in ITM, ATM, OTM. These relationships help determine the intrinsic value which is a key factor in option pricing overall.
Since I continue to see beginners struggle with this concept, I put together these 6 quick examples below to help you figure this moneyness out once and for all.
In-The-Money (ITM)
For a long call option, the option will be ITM if the strike price is below the current value of the stock trading in the market.
or a long put option, the option will be ITM if the strike price is above the current value of the stock trading in the market.
Out-Of-The-Money (OTM)
For a long call option, the option would be OTM if the strike price is above the current value of the stock trading in the market.
For a long put option, the option would be OTM if the strike price is below the current value of the stock trading in the market.
At-The-Money (ATM)
For both long calls and long puts, the option is considered ATM when the strike price and stock price are the same.
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Consider this the “tipping point” between an option being OTM and ITM. Generally it is hard to find ATM options that have the exact same strike price as the stock, so anything within a couple points of the closest strike price is considered ATM for options traders.
What About Short Options?
Short option contracts are just the mirror image of the above long contract payoff diagrams. Most of the option moneyness examples we have here would be the reverse for short option contracts. So feel free to bookmark this page and use it as a reference guide in the future.
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