Moneyness — Concept Explainer Video

Transcript

Where does the strike sit?

Moneyness compares the underlying price with the strike. It describes whether an option has intrinsic value right now. It does not tell you whether the trade is profitable, because it ignores the premium paid and trading costs.

Calls look upward

For a call, the option is in the money when the stock is above the strike. With a stock at one hundred five, a one hundred dollar call has five dollars of intrinsic value. A one hundred ten dollar call is out of the money.

Puts look downward

For a put, the relationship reverses. At that same one hundred five dollar stock price, a one hundred ten dollar put is in the money by five dollars. A one hundred dollar put is out of the money.

In the money can still lose

Suppose you paid seven dollars for the one hundred dollar call. At expiration with the stock at one hundred five, the call is in the money but worth only five. Your loss is two dollars per share before costs.

A location, not a forecast

At the money means the strike is equal or very close to the underlying price. Out of the money options can still have time value before expiration. Use moneyness to locate the contract, then assess price, time, and risk separately.