Lesson 2 of 6 · All lessons in this module
  1. Payoff at expiration and exercise value before it
  2. Moneyness: in, at and out of the money
  3. Time value and time value decay
  4. Arbitrage: forwards versus options, and option price boundsVideo lesson
  5. Replication: forwards versus options
  6. Factors that determine an option's valueVideo lesson

Lesson 2 of 6 · 10 min

Moneyness: in, at and out of the money

Moneyness compares the underlying price with the exercise price; it tells you how likely exercise is and how strongly the option's price reacts to the underlying.

In short

  • A call is in the money (ITM) when St>XS_t > X, at the money (ATM) when St=XS_t = X, and out of the money (OTM) when St<XS_t < X.
  • A put is the mirror image: ITM when St<XS_t < X, ATM when St=XS_t = X, OTM when St>XS_t > X.
  • ITM options are more likely to be exercised; OTM options are less likely.
  • A deep-in-the-money option moves almost one-for-one with the underlying; a deep-out-of-the-money option barely moves.
  • Moneyness is a handy way to compare options on the same underlying with different exercise prices or maturities.

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