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Do You Know “Moneyness” in Options Trading

Moneyness: Option Strike Prices

Stock option strike prices fall into the three categories, depending on their relationship to the stock’s price (known as the “money”). This relationship to the “money” is known as moneyness.

  • In the money (ITM)

 

    • At the money (ATM) – this is used to refer to options near but not exactly at the money
  • Out of the money (OTM)

 

CALLS Strike Price PUTS
Strike below stock price ITM Strike above stock price
Strike same as stock price ATM Strike same as stock price
Strike above stock OTM Strike below stock

 

The purpose of the two tables below is to illustrate the relationship of different call and put strikes to the money and how these relationships change as the stock price moves. Notice how strike price “intrinsic” refers to the amount of the premium is in the money.

Moneyness – Stock Price is $20.78
CALLS PUTS
Relative to Strike Amount ITM Strike Amount ITM Relative to Strike
ITM $3.28 17.50 $0.00 OTM
ITM $0.78 20.00 $0.00 OTM
20.78
OTM $0.00 22.50 $1.72 ITM
OTM $0.00 25.00 $4.22 ITM

 

At $20.78, two of the call strikes are ITM and two are OTM. Same for the puts; two are ITM and two are OTM. But notice when the price drops to $17, all four call strikes become OTM and all four put strikes are ITM. This is based solely on the movement of the strike price.

Moneyness – Stock Price is $17.00
CALLS PUTS
Relative to Strike Amount ITM Strike Amount ITM Relative to Strike
OTM $0.00 17.50 $0.50 ITM
OTM $0.00 20.00 $3.00 ITM
20.78
OTM $0.00 22.50 $5.50 ITM
OTM $0.00 25.00 $8.00 ITM

Options that are $0.50 or so of the stock price and thus slightly ITM or OTM, frequently are referred to as near the money (or NTM) options. The term “at the money” also is used to refer to NTM options.

Understanding the moneyness of the call option is important, because then you only need to remember that the moneyness of the put is the opposite, ITM and OTM.

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