What Are Options Moneyness?
Options Moneyness!!! When it comes to options trading, the description of a particular derivative while associating the strike price with the price of an underlying asset or security is known as moneyness. To put it more simply, moneyness in options trading refers to the intrinsic value of the option at its current state. It describes the relationship of the strike price of a specific option with respect to the current price of trading of the underlying security. During the process of trading, moneyness informs the individuals holding options whether they should exercise their right and whether this exercising of right will lead to any profit. There are several forms of moneyness including the, at the money or the in out money. However, in all cases, it focuses on the value of a specific option, if you are going to exercise it at the very instance. In this trade, a loss would mean that the option is currently out of money. At the same time, a gain or a profit would imply that it is currently in the money. The, At the money option refers to the possibility of breaking even after you exercise the option. In case you are willing to know more about it, here’s a detailed insight on everything that you wanted to know about moneyness.
An options quote usually contains the name of the existing, underlying asset or security (Yahoo, for instance), the date of its expiration (December, for instance), its strike price (400, for instance) and finally its class (call, for instance). Another essential element here would be the option premium. This premium is the amount of the money that is paid by the buyer of an option to the concerned seller for the right over an underlying asset of security. In this regard, we should note that the premium fetches the buyer only the right and not the obligation to exercise this right. While analyzing the option premium, one should not confuse it with the strike price, which again is the price at which a particular contract is likely to be exercised.
The elements, mentioned above, collectively work for determining the moneyness of an option. In other words, they describe the intrinsic value of the option, which is directly correlated to the strike price and the price of an underlying asset of security.
Categories of options Moneyness
Moneyness can be classified into, in the money options, at the money options and out of the money options. Here, we will give you a detailed insight on each of these options.
In the money option- This option refers to the condition where the strike price of the call action is right below the market rate of the underlying asset or security. It also comes to play when the strike price of a specific put option is just above the asset or security’s market price. One should note that in the money options does not necessarily mean that you are going to profit by exercising your right. It rather means that the specific option is profitable to exercise. This again happens as the option is going to cost some money to be bought.
Out of the money- In case of call options, out of the money comes to play when the strike rate of the call is much above the current market rate of the existing security. For put options, out of the money refers to the situation where the strike rate is much below the current market price of an underlying asset or security.
At the money- At the money option refers to call or put option where the strike rate is equal to the current market rate of the underlying security. Both the call and the put actions will be at the money, at the same time.
Intrinsic value of in the money, at the money and out of the money options
In the money- In the money options are comparatively more expensive than the two. This is primarily because the premiums of the ITM options comprises of a major intrinsic value right on top of the time value.
Out of the money- These options do not come with an intrinsic value. This is primarily because their entire set of premium is made of the time value only. When it comes to costs, the out of the money options are usually less extravagant compared to the ITM ones. This is mostly because they have a greater possibility of being expired.
At the money- The at the money option does not come with an intrinsic value. It only comes with a time value, which again is highly influenced by the volatility with regard to the time and the existing asset.