How To Determine Option Moneyness?
To determine an option's moneyness, compare the stock price with the strike price. A call is in the money (ITM) when the stock price is above the strike, at the money (ATM) when it is equal or very close, and out of the money (OTM) when it is below. A put is the reverse: ITM when the stock is below the strike and OTM when it is above. Only ITM options have intrinsic value (stock minus strike for a call, strike minus stock for a put); the rest of an option's price is time value.
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| Option | In the money | At the money | Out of the money |
|---|---|---|---|
| Call | Stock price > strike | Stock price = strike | Stock price < strike |
| Put | Stock price < strike | Stock price = strike | Stock price > strike |
Option Pricing
Options pricing incorporates several factors to calculate a fair and reasonable value for a range of options. This range of options can include buying a call option, which is the right to buy an underlying security, or buying a put option, the right to sell an underlying security.
In The Money
Options pricing includes several components to arrive at a fair value. Investors must consider things like the price of the option, the time to expiration for the option and the underlying price. When the underlying price is greater than the strike price of a call option, then the option is said to be in the money. Conversely, when the underlying price is less than the strike price of a put option, the option is said to be in the money.
Out of Money
Options pricing uses other components to generate a fair value. Investors must also consider variables like implied volatility, delta, gamma, rho and theta. When the underlying price is less than the strike price of a call option, the option is said to be out of the money. Conversely, when the underlying price is greater than the strike price of a put option, the option is said to be out of the money.
At The Money
An option whose strike equals (or is closest to) the current stock price is at the money, for both calls and puts. Moneyness depends only on the stock price and strike, not on the pricing model. At-the-money options have no intrinsic value, the most time value, and a delta near 0.50 for calls (about -0.50 for puts).
MarketXLS
MarketXLS is an Excel add-in that can find strikes by moneyness. =StrikeNext("AAPL", 0) returns the at-the-money strike, and =StrikeNext("AAPL", "otm_call_1") or =StrikeNext("AAPL", "itm_put_1") return the first out-of-the-money call or in-the-money put strike. Combine the result with =OptionSymbol(...) and =QM_Last(...) to price the contract. Options data is end-of-day on the Standard plan and real-time on the Advanced and Business plans.
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