Published on

What is moneyness

Authors
  • avatar
    Name
    Benton Li
    Twitter

Definition: moneyness is how much you profit if you exercise the option. By saying profit I don’t really mean you will necessarily earn money.

Quick revisit, an option is a contract that gives you a right to exercise at the strike price/rate.

There are 3 kinds of moneyness (with informal definitions):

In the money (ITM): if you exercise, you pay less or receive more

Out of the money (OTM): if you exercise, you pay extra or receive less

At the money (ATM): exercising or not doesn't matter

We will see a simple example.

Suppose you are a chipmunk. You have a European call contract that allows you to buy 100 nuts at the strike price of $100 per pound next week.

A week later, if the market unit price for nuts can be

  • $95: paying at a strike price of $100 makes you a dumb fuck. So your contract is OTM
  • $100: exercising or not doesn’t make a difference. So your contract is ATM
  • $105: strike price of $100 is a fat discount to you, big win. So your contract is ITM

Intuitively, it will be the opposite in put contract.

Read more about options