Moneyness

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"In the money" redirects here; for the poker term, see In the money (poker).

In finance, moneyness is a measure of the degree to which a derivative is likely to have positive monetary value at its expiration, in the risk-neutral measure.

1 At-the-money
2 In-the-money
3 Out-of-the-money
4 Example
5 See also
6 References

[edit] At-the-money

An option is at-the-money if the strike price, i.e., the price the option holder must pay to exercise the option, is the same as the current price of the underlying security on which the option is written. An at-the-money option has no monetary value, only time value.

[edit] In-the-money

In-the-money options has positive monetary value as well as time value. A call option is in-the-money when the strike price is below the current trading price. A put option is in-the-money when the strike price is above the current trading price.

[edit] Out-of-the-money

An out-of-the-money option has no monetary value. A call option is out-of-the-money when the strike price is above the current trading price of the underlying security. A put option is out-of-the-money when the strike price is below the current trading price of the underlying security.

[edit] Example

Suppose the current stock price of IBM is $100. A call or put option with a strike of $100 is at-the-money. A call option with a strike of $80 is in-the-money (100 - 80 = 20 > 0). A put option with a strike at $80 is out-of-the-money (80 - 100 = -20 < 0). Conversely a call option with a $120 strike is out-of-the-money and a put option with a $120 strike is in-the-money.

When one uses the Black-Scholes model to value the option, one may define moneyness quantitatively. If we define the moneyness as

$m = \frac{d_1+d_2}{2}$

where $d 1$ and $d 2$ are the standard Black-Scholes parameters then

$m = \frac{\ln(S/K)+rT}{\sigma\sqrt T}$ ,

where T is the time to expiry.

This choice of parameterisation means that the moneyness is zero when the forward price or the underlying price discounted at the risk-free rate equals the strike price. Such an option is often referred to as at-the-money-forward. Moneyness is measured in standard deviations from this point, with a positive value meaning an in-the-money option and a negative value meaning an out-of-the-money option.

Note that $r$ is the risk-free rate, not the expected return on the underlying.