Discover the concept of ‘moneyness’
Moneyness is the relationship between the strike price and the market price of the underlying asset during the lifetime of an option. Learn about the difference between ‘at the money’, ‘in the money’, and ‘out of the money’ and what each term means.
Learn how options can be used in practice
Now that you have learned how options work, discover how they can be used in practice. Learn about the financial performance (profit or loss) of the positions you can take when trading options. Understand the different payoffs of calls and puts and long and short positions.
Moneyness explained in detail
An option is referred to as “at-the-money” when its strike price is equal to the (future) price of the underlying value (future = spot price + interest over the life time – dividends paid during the life time).
A call option is referred to as “in-the-money” when its strike price is below the (future) price of the underlying value. A put option is referred to as “in-the-money” when its strike price is above the (future) price of the underlying value.
A call option is referred to as “out-of-the-money” when its strike price is above the (future) price of the underlying value. A put option is referred to as “out-of-the-money” when its strike price is below the (future) price of the underlying value.
When a call option is in-the-money, then a put option of the same series is out-of-the-money, and vice versa.
The option premium consists of two components, intrinsic value and time value. The time value is highly dependent on the time-to-maturity, the price volatility of the underlying asset and on the moneyness of the option series. Generally, the higher the price volatility, the higher the time value. Also, the longer the time-to-maturity, the higher the time value. When comparing options with an identical underlying value and time-to-maturity, at-the-money options have the highest time value.
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