## Moneyness

Definition

Definition

**Moneyness**is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a three-fold classification: if the option would make money if it were to expire today, it is said to be

**in the money**, while if it would

**not**make money it is said to be

**out of the money**, and if the current price and strike price are equal, it is said to be

**at the money**. There are two slightly different definitions, according to whether one uses the current price (spot) or future price (forward), specified as "at the money spot" or "at the money forward", etc.

This rough classification can be quantified by various definitions to express the moneyness as a number, measuring how far the asset is in the money or out of the money with respect to the strike – or conversely how far a strike is in or out of the money with respect to the spot (or forward) price of the asset. This quantified notion of moneyness is most importantly used in defining the

*relative*volatility surface: the implied volatility in terms of moneyness, rather than absolute price. The most basic of these measures is

**simple moneyness**, which is the ratio of spot (or forward) to strike, or the reciprocal, depending on convention. A particularly important measure of moneyness is the likelihood that the derivative will expire in the money, in the risk-neutral measure. It can be measured in percentage probability of expiring in the money, which is the forward value of a binary call option with the given strike, and is equal to the auxiliary

*N*(

*d*2) term in the Black–Scholes formula. This can also be measured in standard deviations, measuring how far above or below the strike price the current price is, in terms of volatility; this quantity is given by

*d*2. Another closely related measure of moneyness is the Delta of a call or put option, which is often used by traders but actually equals

*N*(

*d*1), not

*N*(

*d*2), and there are others, with convention depending on market.

In short,

**Moneyness**is a term describing the relationship between the

**of an option and the current trading price of its**

__strike price__**In options trading, terms such as**

__underlying security.__**,**

__in-the-money__**and**

__out-of-the-money__**describe the moneyness of options.**

__at-the-money__**In-the-Money (ITM)**

A call option is in-the-money when its strike price is below the current trading price of the underlying asset.

A put option is in-the-money when its strike price is above the current trading price of the underlying asset.

In-the-money options are generally more expensive as their premiums consist of significant intrinsic value on top of their time value.

**Out-of-the-Money (OTM)**

Calls are out-of-the-money when their strike price is above the market price of the underlying asset.

Puts are out-of-the-money when their strike price is below the market price of the underlying asset.

Out-of-the-money options have zero intrinsic value. Their entire premium is composed of only time value. Out-of-the-money options are cheaper than in-the-money options as they possess greater likelihood of expiring worthless.

**At-the-Money (ATM)**

An at-the-money option is a call or put option that has a strike price that is equal to the market price of the underlying asset. Like OTM options, ATM options possess no intrinsic value and contain only time value which is greatly influenced by the volatility of the underlying security and the passage of time.

Often, it is not easy to find an option with a strike price that is exactly equal to the market price of the underlying. Hence, close-to-the-money or near-the-money options are bought or sold instead.