Moneyness

Moneyness is a term which is describing the relationship between the strike price of an option and the fair market price at the expiry date according to current prices. In other words the fair market price at the expiry is date is the forward rate.

Options can be classified in three types according to their moneyness; In the money, Out of the money, At the money.

For currency options at the money price can be defined in three different ways.

1)At the money spot: At the money level is accepted as the current spot price and the moneyness of the option is calculated by using this level.

2)At the money forward: At the money level is accepted as the current forward price and the moneyness of the option is calculated by using this level

3)At the money delta: At the money level is accepted as the price level where the value of the Call option equals to the value of the Put option. In other words the price level where Delta of the option is % 50.


At the money:

A call option is at the money when the strike price equals to the At the Money level. A put option is at the money when the strike price equals to the At the Money level.

At the money options has only the time value and no intrinsic value.


In the money:

A call option is in the money when the strike price is lower than the At the Money level. A put option is in the money when the strike price is higher than the At the Money level. Since in the money options has significant amount of intrinsic value on top of their time values, these options are quite expensive.


Out of the money:

A call option is out of the money when the strike price is higer than the At the Money level. A put option is out of the money when the strike price is lower than the At the Money level. Out of the money options has only the time value and no intrinsic value. Since the probability to be in the money at the expiry that is lower for out of the money options, their premiums are lower than the in the money options.

Amount of the moneyness is measured by the delta of an option. Delta of an option is between % 0 to % 100. An at the money option’s delta is % 50. If delta decreases the option becomes more out of the money and if delta increases the option becomes more in the money. If delta of an option is less than % 50 then the option is out of the money. If delta of an option is greater than % 50 then the option is in the money.
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