What is moneyness of options?
The moneyness in options serves as a signal or indicator if the investors would make more money with options or not if exercised properly. The moneyness in options is applicable for both put options and call options. It is used mostly with these two options.
So if you are into options trading then you should know more about what is moneyness of options is.
Moneyness in options shows the value that is intrinsic in the stock market. The moneyness in options trading can be determined by the value of the underlying stock or asset to the strike price of a derivative. It considers either its current price or future price. When the stock or contract price is above the strike price, then the call option is considered as the In The Money (ITM). "In" the money here means profit. On the contrary, if the stock or contract price is below the strike price, then that call option is considered as Out The Money (OTM). "Out" here means loss. In the money option means there is some intrinsic value of the stock but out the money options clearly states that the options is expired.
For ATM, the investors casually refer to the option being near the money or close to the money, or far from money. For OTM, the owner of the stock hopes the price will change. And for the ITM, if the current price of the contract is greater than the strike price of the contract, then there is a chance the owner would get a profit.
There are three in, out, and at-the-money options. At the money (ATM) means the breakeven point during exercising the options.
With the help of moneyness in options, the investors can look at the future value of an options if the investor exercises it in the correct way. Investors often speak about moneyness with other terms that are mostly used in the stock market when talking about the value of the options. These terms are intrinsic value, time value, and time of expiration (time until expiration).
Options moneyness formula
While considering the moneyness of options contract, the value of the options is considered in two different ways. There is some options moneyness formula that you should know about. There is some options moneyness formula that you should know about. First one is Intrinsic Value and the second one is Time Value. Adding them both together gives the options value. So the options moneyness formula
Putting the above in formula,
Options Value = Intrinsic Value + Time Value
At the time of contract expiration, the time value tends to be 0. So at that time, the options value is calculated like,
Options Value = Intrinsic Value + 0
So, this was basic about the value of the options and options moneyness formula.
Now, this what is the moneyness of options is all about. Now let us understand moneyness with an example.
Example of moneyness in options trading,
Let us say there is a stock of ABC company. The value of this stock is INR 50. So, at INR 50 the put or call option would be at the money. If the investors need to exercise this option, then it may result in breakeven for the stock investor. So let us say there is a put option having a strike price of INR 75 then it is considered as in money as it will enable the investor to sell the stock at a higher price than its current trading price. The put having the strike price of INR 75 is considered as out money as there is no way the investor would not want to buy the stock at INR 75 that is available in the market for only INR 50.
So this was the basic example of moneyness of options contract. So if there is profit or loss of buying the options.
So if the investors want to make better decisions for the investment they should have an idea about the moneyness of options contract. So knowing this would help you.
The moneyness in options trading simply means if the options value has a greater time value. So if the call options expires the following month, then the options value will be higher than the intrinsic value.
When you want to buy the options at a particular strike price then, moneyness plays an important role.
There are two quite different definitions that need to be considered in moneyness. The first one is the spot price (current price) and the second one is the forward price (future price). The spot price can be said as "at the money spot" and the forward price can be said as "at the money forward".
There are many ways to measure moneyness.