The Moneyness of Options

The relationship between the spot price of the underlying and the strike price is described by the moneyness of an option.

• In-the-money (ITM) option

• Call option: A call option is said to be ITM when its strike price is below the spot price (current market price) of the underlying i.e. strike price<spot price of the underlying.

 If the strike price is far below the spot price, then the option is called Deep ITM.

• Put option: A put option is said to be ITM when its strike price is greater than the spot price i.e. strike price>spot price of the underlying.

If the strike price is far above the spot price, then the option is called Deep ITM.  

• Out-of-the-money (OTM) option

• Call option: A call option is said to be OTM when its strike price is above the spot price (current market price) of the underlying i.e. strike price>spot price of the underlying.

If the strike price is far higher than the spot price then the option is called Deep OTM.

• Put option: A put option is said to be OTM when its strike price is below the spot price e. strike price<spot price of the underlying.

 If the strike price is far below the spot price then the option is called Deep OTM.

• At-the-money (ATM) option

• Call option: A call option is said to be ATM when its strike price is equal to the spot price of the underlying i.e. strike price=spot price of the underlying.

• Put option: A put option is said to be OTM when its strike price is equal to the spot price of the underlying i.e. strike price=spot price of the underlying.

We shall use the following example to understand moneyness. The chart below provides you with information pertaining to NIFTY options for various strike prices.

Underlying asset=Nifty 50 Index.

Value=11,440.05 points (on September 14, 2020)

Days to expiry=9