Moneyness is the relationship between the strike price and the market price of the underlying asset during the lifetime of an option. Learn about the difference between ‘at the money’, ‘in the money’, and ‘out of the money’ and what each term means.
Moneyness explained in detail
At-the-money
An option is referred to as “at-the-money” when its strike price is equal to the (future) price of the underlying value (future = spot price + interest over the life time – dividends paid during the life time).
In-the-money
A call option is referred to as “in-the-money” when its strike price is below the (future) price of the underlying value. A put option is referred to as “in-the-money” when its strike price is above the (future) price of the underlying value.
Out-of-the-money
A call option is referred to as “out-of-the-money” when its strike price is above the (future) price of the underlying value. A put option is referred to as “out-of-the-money” when its strike price is below the (future) price of the underlying value.
Moneyness, call vs put
When a call option is in-the-money, then a put option of the same series is out-of-the-money, and vice versa.
Option valuation based on intrinsic value, volatility and moneyness
The option premium consists of two components, intrinsic value and time value. The time value is highly dependent on the time-to-maturity, the price volatility of the underlying asset and on the moneyness of the option series. Generally, the higher the price volatility, the higher the time value. Also, the longer the time-to-maturity, the higher the time value. When comparing options with an identical underlying value and time-to-maturity, at-the-money options have the highest time value.