Moneyness of an Option Explained
Options traders often use "moneyness" to describe the relationship between an option's strike price and the current stock price.
What is Option Moneyness?
The moneyness of an option refers to three specific options trading terms:
1. In-the-Money
2. At-the-money
3. Out-of-the-money
Let's quickly discuss each of these terms in regards to call and put options.
What is an "In-the-Money" Option?
An "in-the-money" option is any option contract that currently has intrinsic value. If you're unfamiliar with intrinsic and extrinsic value, intrinsic value simply means that the option will be worth something at expiration if the stock price remains at its current level. Let's take a look at some examples:
Stock Price | Call Option Strike Price | Intrinsic Value | In-the-Money? |
|---|---|---|---|
$100 | $110 | $0 | No |
$125 | $100 | $25 | Yes |
$150 | $145 | $5 | Yes |
As we can see here, call options are "in-the-money" when the call's strike price is below the current stock price, as that means the call has intrinsic value.
The opposite is true for put options:
Stock Price | Put Option Strike Price | Intrinsic Value | In-the-Money? |
|---|---|---|---|
$100 | $110 | $10 | Yes |
$125 | $100 | $0 | No |
$150 | $155 | $5 | Yes |
As the table suggests, any put option with a strike price above the current stock price is considered in-the-money, as the put option has intrinsic value.
Here's a picture showing the in-the-money options for IWM when the stock is trading for $137.21:
What is an "At-the-Money" Option?
The moneyness of an option is said to be "at-the-money" when the option's strike price is very close or equal to the current stock price. The concept applies to both call and put options.
Stock Price | Call / Put Option Strike Price | At-the-Money? |
|---|---|---|
$100 | $110 | No |
$125 | $125 | Yes |
$150 | $160 | No |
Here's a visual showing the real at-the-money options in IWM with the stock trading at $137.21:
While the 137 call option is technically in-the-money since its strike price is below the stock price, the 137 call would be the call option that's considered at-the-money.
What is an "Out-of-the-Money" Option?
Lastly, the moneyness of an option is said to be "out-of-the-money" when the option has no intrinsic value. That means a call option is out-of-the-money when the strike price is above the stock price:
Stock Price | Call Option Strike Price | Intrinsic Value | Out-of-the-Money? |
|---|---|---|---|
$100 | $110 | $0 | Yes |
$125 | $100 | $25 | No |
$150 | $155 | $0 | Yes |
A put option is out-of-the-money when the strike price is below the current stock price:
Stock Price | Put Option Strike Price | Intrinsic Value | Out-of-the-Money? |
|---|---|---|---|
$100 | $110 | $10 | No |
$125 | $100 | $0 | Yes |
$150 | $155 | $5 | No |
Here's a snapshot of all the out-of-the-money options with IWM trading at $137.21:
Here's a snapshot of all the out-of-the-money options with IWM trading at $137.21:
Congratulations! You now know what the moneyness of an option is! Now, you'll always know what an options trader is talking about when they use the moneyness terms to describe an option.
Summary of Main Concepts
To quickly summarize what this post has covered, here are the key points to remember:
The moneyness of an option refers to the relationship between the option's strike price and the current stock price. | |
|---|---|
In-the-money refers to options with intrinsic value. Call options with strike prices below the stock price and put options with strike prices above the stock price are said to be in-the-money. | |
At-the-money refers to any option with a strike price equal to or near the current stock price. This applies to both calls and puts. | |
Out-of-the-money refers to options with no intrinsic value. Call options with strike prices above the stock price and put options with strike prices below the stock price are said to be out-of-the-money. |