What is Moneyness in Options?

When you open an option chain, you will find several strike prices for the same underlying asset and expiry. Some strikes are closer to the current market price, while others are considerably above or below it. This is where the concept of moneyness becomes relevant.

Moneyness describes the position of an option’s strike price with respect to the current price of the underlying asset. This relationship can be used to classify an option as being At the Money (ATM), Out of the Money (OTM) or In the Money (ITM).

What is moneyness in options?

Moneyness gives the relation between the current market price of its underlying asset and an option's strike price.

The strike price is the predetermined price at which the underlying asset can be bought or sold if the option is exercised. The current market price, on the other hand, is the price at which the underlying is presently trading.

Suppose an index is trading at 25,000. Its options may be available at strikes such as 24,800, 24,900, 25,000, 25,100, and 25,200.

Whether each of these options is ITM, ATM, or OTM depends not only on its strike but also on whether it is a call option or put option. That distinction is important because calls and puts have opposite moneyness relationships.

Moneyness is also a foundational concept covered in many online option trading courses, as it helps traders understand how different strikes relate to the current price.

Types of moneyness in options

The types of moneyness in options are as follows:

In the Money (ITM)

When an option has intrinsic value, it is an In the Money option. 

When the underlying price for a call option is above the strike price, it is considered ITM. If an index trades at 25,000, a 24,800 call is ITM because its strike is 200 points below the current index level.

For a put option, the relationship is reversed. A put becomes ITM when the underlying trades below its strike price. Therefore, if the index is at 25,000, a 25,200 put is ITM.

At the Money (ATM)

An option is at the money when its strike price is equal or very close to the current price of the underlying asset.

If an index is trading around 25,000, the 25,000 strike would generally be considered an ATM. At this point, the option has little or no intrinsic value. However, its premium can still have time value.

Out of the Money (OTM)

An option is considered OTM when it would not provide any intrinsic value if exercised at the current underlying price. 

For calls, strikes above the current market price are OTM. If the index is trading at 25,000, a 25,200 call is OTM. For puts, strikes below the current market price are OTM. At the same index level, a 24,800 put would therefore be OTM.

How moneyness changes with the underlying price

Moneyness is not permanent. Suppose a stock is trading at ₹1,000. A ₹1,050 call is OTM because the strike is above the current stock price.

If the stock subsequently rises to ₹1,050, that option moves closer to ATM.  If the stock continues to ₹1,100, the same ₹1,050 call becomes ITM.  The option contract remains unchanged. What changed is the underlying price and, therefore, its relationship with the strike.

Conclusion

Moneyness provides a simple way to understand where an option's strike price stands relative to the current price of its underlying asset. With this, the options are differentiated into three categories: ITM, ATM and OTM options. 

These classifications help traders understand intrinsic value and organise different strikes when examining an option chain. Beginners can better understand ITM, ATM, and OTM classification with an option trading full course from Upsurge.club, which can make it easier to read different strike prices.