Do You Know "Moneyness" In Options Trading
Moneyness: Option Strike Prices
Stock option strike prices fall into the three categories, depending on their relationship to the stock’s price (known as the “money”). This relationship to the “money” is known as moneyness.
- In the money (ITM)
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- At the money (ATM) – this is used to refer to options near but not exactly at the money
- Out of the money (OTM)
| CALLS | Strike Price | PUTS |
| Strike below stock price | ITM | Strike above stock price |
| Strike same as stock price | ATM | Strike same as stock price |
| Strike above stock | OTM | Strike below stock |
The purpose of the two tables below is to illustrate the relationship of different call and put strikes to the money and how these relationships change as the stock price moves. Notice how strike price “intrinsic” refers to the amount of the premium is in the money.
| Moneyness – Stock Price is $20.78 | ||||
| CALLS | PUTS | |||
| Relative to Strike | Amount ITM | Strike | Amount ITM | Relative to Strike |
| ITM | $3.28 | 17.50 | $0.00 | OTM |
| ITM | $0.78 | 20.00 | $0.00 | OTM |
| 20.78 | ||||
| OTM | $0.00 | 22.50 | $1.72 | ITM |
| OTM | $0.00 | 25.00 | $4.22 | ITM |
At $20.78, two of the call strikes are ITM and two are OTM. Same for the puts; two are ITM and two are OTM. But notice when the price drops to $17, all four call strikes become OTM and all four put strikes are ITM. This is based solely on the movement of the strike price.
| Moneyness – Stock Price is $17.00 | ||||
| CALLS | PUTS | |||
| Relative to Strike | Amount ITM | Strike | Amount ITM | Relative to Strike |
| OTM | $0.00 | 17.50 | $0.50 | ITM |
| OTM | $0.00 | 20.00 | $3.00 | ITM |
| 20.78 | ||||
| OTM | $0.00 | 22.50 | $5.50 | ITM |
| OTM | $0.00 | 25.00 | $8.00 | ITM |
Options that are $0.50 or so of the stock price and thus slightly ITM or OTM, frequently are referred to as near the money (or NTM) options. The term “at the money” also is used to refer to NTM options.
Understanding the moneyness of the call option is important because then you only need to remember that the moneyness of the put is the opposite, ITM and OTM.
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