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Moneyness of Options

Moneyness of an Option Contract​

Moneyness refers to the classification of an option based on its intrinsic value, which determines how much a trader would make if they exercised the option today. Options are classified as In the Money (ITM), At the Money (ATM), or Out of the Money (OTM).

Intrinsic Value and Moneyness​

  1. Intrinsic Value: The value an option has if exercised today.
    • Call Option: Intrinsic Value = Spot Price - Strike Price
    • Put Option: Intrinsic Value = Strike Price - Spot Price

Options with positive intrinsic values are ITM, and those without intrinsic value are OTM. ATM options are closest to the spot price.

ITM, ATM, OTM Explained​

  1. In the Money (ITM): An option that would make money if exercised today.
    • Call Option: Strike price is below the spot price.
    • Put Option: Strike price is above the spot price.
  2. At the Money (ATM): The strike price is closest to the spot price.
  3. Out of the Money (OTM): An option that has no intrinsic value and wouldn’t make money if exercised today.
    • Call Option: Strike price is above the spot price.
    • Put Option: Strike price is below the spot price.

Example of Moneyness for Call Options​

  • Spot Price: ₹8,060
  • Strike Prices: ₹7,100, ₹7,500, ₹8,050, ₹8,100, ₹8,300

Calculating Moneyness:

  • ₹7,100 Strike: ITM (Intrinsic Value = ₹960)
  • ₹8,050 Strike: ATM (Closest to the spot price)
  • ₹8,300 Strike: OTM (Intrinsic Value = 0)

Moneyness for Put Options​

For put options, ITM strikes are higher than the spot price, and OTM strikes are lower.
Example: If the spot price is ₹8,202:

  • A ₹8,500 strike put option is ITM.
  • A ₹7,500 strike put option is OTM.

The Option Chain​

An option chain lists all strike prices and their corresponding premiums for call and put options. It provides insights into the moneyness of options, helping traders identify ITM, ATM, and OTM options for better decision-making.

Conclusion​

Understanding moneyness is crucial in options trading, as it influences the premium, risk, and potential payoff of options. AlgoTest users can leverage this knowledge when creating and backtesting strategies using the Strategy Builder and Simulator.