Moneyness refers to whether an option is in the money, at the money, out of the money.
In The Money: If immediate exercise of the option would generate a gain.
1. For a call option, when the option's strike price is below the market price of the underlying asset.
2. For a put option, when the strike price is above the market price of the underlying asset.
For example, if John buys a call option on ABC stock with a strike price of $12, and the price of the stock is sitting at $15, the option is considered to be in the money. This is because the option gives John the right to buy the stock for $12 but he could immediately sell the stock for $15, a gain of $3.
Out of the money: If immediate exercise of the option would generate a loss.
1. For a call option, when the strike price is higher than the market price of the underlying asset,
2. For a put option, when the strike price is lower than the market price of the underlying asset.
For example, consider a stock that is trading at $10. For such a stock, call options with strike prices above $10 would be out of the money calls, while put options with strike prices below $10 would be out of the money puts.
At the money: A situation where an option's strike price is identical to the price of the underlying security. For example, if XYZ stock is trading at 75, then the XYZ 75 call option is at the money and so is the XYZ 75 put option.
Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University
