What is Moneyness and How Does it Work?

In the options universe, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option.

As a reminder, the strike price is the price at which the option holder can buy (for a call option) or sell (for a put option) the underlying asset.

Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

Because moneyness relates to the value of an option, the two primary components of an option’s value - intrinsic and extrinsic value - provide further perspective on the concept of moneyness.

In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option. 

The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.

Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value. 

Taken all together, that means for a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price. 

The intrinsic value of an ITM call option is calculated as the difference between the current market price and the strike price, while for an ITM put option, it's also the difference between the strike price and the current market price.

What is an example of moneyness?

Imagine the hypothetical stock XYZ Corp, which is currently trading at $50 per share. If one were to trade a $50-strike call, that would represent an ATM option, while a $45-strike call would represent an ITM option, and a $55-strike call would represent an OTM option. 

What does 100% moneyness mean?

The term "100% moneyness" is not necessarily a universally accepted term in options trading, but may be an informal way of indicating that an option is ATM.

In such cases, the strike price of the option would be equal to the current market price of the underlying asset. When the moneyness is 100%, it generally implies that the option has no intrinsic value.

The concept of "moneyness" is crucial in the options world because the relative moneyness of an option may dictate how an investor or trader decides to use (or not use) that option in a given trading strategy. 

In this regard, the moneyness of a given option provides an investor or trader with a basic idea of its risk and reward profile. 

For example, ITM options may be rich in premium, but have a higher probability of remaining profitable if exercised. OTM options, on the other hand, typically have less premium, but have a higher risk of expiring worthless. 

Understanding the moneyness of an option can help investors and traders align their trading strategies with their market outlook, risk tolerance, and investment objectives. Therefore, moneyness is not just a descriptor, but a critical factor that influences the strategic application of options in the financial markets.

For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price. 

The intrinsic value of an ITM call option is calculated as the difference between the current market price and the strike price, while for an ITM put option, it's also the difference between the strike price and the current market price.

In-The-Money Overview

Call Option: An ITM call option is one where the current market price of the underlying asset is higher than the option's strike price. In this case, exercising the option would provide immediate economic benefit.

Intrinsic Value: Current Market Price - Strike Price

Put Option: An ITM put option is one where the current market price of the underlying asset is lower than the option's strike price.

Intrinsic Value: Strike Price - Current Market Price

Learn more about in the money.

Of the three types of moneyness (ITM, OTM and ATM), the definition of an at-the-money option is slightly less rigid than that of ITM and OTM options.

In general, an ATM option is one where the current market price of the underlying asset is very close to or equal to the strike price of the option. That means an ATM may not have a high intrinsic value, but it may be rich in so-called “time value.”

In options trading, time value refers to the portion of an option's premium that is attributable to the amount of time remaining until the option's expiration date. Time value is therefore a component of an option's extrinsic value, not its intrinsic value.

Imagine for example that a stock is trading for $50/share. In this case, the $50-strike calls and puts would represent the at-the-money options across all expiration periods. 

In the most basic terms, an OTM option is one that has no intrinsic value. 

For calls, that means an OTM option is one where the current market price of the underlying asset is lower than the option's strike price. Exercising this option would therefore not yield any benefit.

For puts, on the other hand, an OTM option is one where the current market price of the underlying asset is higher than the option's strike price.

Considering their nature, the value of an OTM option consists entirely of time value and volatility premium.

Delta and moneyness are two different but related concepts in options trading that provide valuable insights into the characteristics of an option.

Delta is one of the "Greeks" in options trading and measures the sensitivity of an option's price to a $1 change in the price of the underlying asset. 

The delta of an option ranges from 0 to 1 for call options and from -1 to 0 for put options. A delta close to 1 (for call options) or -1 (for put options) indicates that the option is likely to move nearly one-for-one with the underlying asset, which usually occurs when the option is deep in-the-money (ITM). 

On the other hand, a delta close to zero implies that the option price will be minimally affected by changes in the underlying asset's price, usually when the option is far out-of-the-money (OTM).

Generally speaking, ITM options have a high absolute delta value (close to 1 or -1), ATM options have a delta around 0.5 for calls and -0.5 for puts, and OTM options have a low absolute delta (close to zero).

Taken together, that means moneyness provides a snapshot of where an option stands relative to the current market price of the underlying asset, whereas delta gives more nuanced information about how the option's price is likely to change as the price of the underlying asset changes. 

Both concepts are important for investors and traders to understand as they develop and manage options-focused strategies.

Delta and moneyness are related in that the delta of an option changes as the option moves from being OTM to ATM to ITM. 

The delta of an option ranges from 0 to 1 for call options and from -1 to 0 for put options. A delta close to 1 (for call options) or -1 (for put options) indicates that the option is likely to move nearly one-for-one with the underlying asset, which usually occurs when the option is deep in-the-money (ITM). 

On the other hand, a delta close to zero implies that the option price will be minimally affected by changes in the underlying asset's price, usually when the option is far out-of-the-money (OTM).

Generally speaking, ITM options have a high absolute delta value (close to 1 or -1), ATM options have a delta around 0.5 for calls and -0.5 for puts, and OTM options have a low absolute delta (close to zero).

In the options universe, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option.

As a reminder, the strike price is the price at which the option holder can buy (for a call option) or sell (for a put option) the underlying asset.

Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).