In this series of articles, we will cover the various "Moneyness of Options" - basically In the Money Options, At the money Options and Out of the Money options. By definition, If the exercise price of a call option is less than the present market (or spot) price of the underlying stock (or index), then the call option is said to be in-the-money option.
2) Moneyness is always looked at from the point of view of the Buyer of the option contract. 3) Moneyness, atleast definition-wise, does not have any relation to the expiry date of the option.
Now as mentioned in points 3 and 4 above, the price or premium paid for buying the option and the expiry date of the option has nothing to do to determine the "moneyness" of this option. In this case the buyer has the right to buy the options at $60 per share (which is the strike price of the option), although the market price of IBM stock is higher ($65). Another way to look at the moneyness is the profitability in the pay off function for this position.


Another way to gauge the moneyness of a Put option is to see whether the current postion is profitable for the buyer or not. Please note that moneyness of options keep changing as the time passes by, and as the spot price of underlying keeps changing.
The reason for this is that the buyer of this call option has the right to buy the stock at a price which at present is smaller than the price he would have to pay to buy the stock in the stock market. However, as explained in the article Time Decay in Options, it has severe impact on moneyness as it determines the price of the option. Hence, this situation is profitable to the Buyer, so it is called In the Money Call Option. As displayed in the payoff graph for the put option, the underlying price is lower than the strike price, so the put option is showing prift to the buyer. Although the stike price of option usually remains contant during the lifetime (unless there is some corporate action), but something which is in the money today, may be out of money tomorrow.


X has bought the IBM call option at $2 and the IBM call option has a strike price of 60 and expiry as 30-May-2010. X had bought a Put Option on IBM stock which has the strike price of $70, which gives him the right to sell the IBM stock at $70.
The content should NOT to be reproduced on any other website or through other medium, without the author's permission. The moneyness of an option is determined by the "relative" values of strike price (Exercise price) and the underlying's spot price.




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