Moneyness
Also written In the money · Out of the money · At the money · ITM · OTM · ATM · In-the-money
Whether exercising an option right now would give the buyer a positive, zero or negative cash flow — classifying it as in the money, at the money or out of the money.
In plain language
Moneyness answers one question about an option, today: if I exercised it this instant, would I be better off?
- In the money (ITM) — exercising produces a positive cash flow. A call is ITM when the strike is below the underlying price; a put is ITM when the strike is above it.
- At the money (ATM) — the strike equals the spot exactly. Exercise produces nothing. Any move from here pushes it one way or the other.
- Out of the money (OTM) — exercising would produce a negative cash flow, so nobody does it. A call is OTM when the strike is above spot; a put is OTM when the strike is below.
Note what the classification ignores: the premium you paid. An option can be comfortably in the money and still have lost you money. Moneyness is about the exercise decision, not the profit and loss.
How it works
Moneyness is the same thing as intrinsic value, expressed as a label instead of a number.
Intrinsic value of a call = max(Spot − Strike, 0)
Intrinsic value of a put = max(Strike − Spot, 0)
Intrinsic value can never be negative, because nobody exercises into a loss. So only ITM options have intrinsic value; ATM and OTM options are made of time value and nothing else.
Exchange traded USDINR options are listed at strike intervals of Rs 0.25 — 82.75, 83.00, 83.25, 83.50 and so on — and the exchange keeps at least 12 in-the-money, 12 out-of-the-money and one near-the-money strike available on every contract. "Near the money" exists as a category precisely because a listed strike rarely sits exactly on the spot rate, so a strictly at-the-money option is a textbook case more than a traded one.
The formula
| Call option | Put option | |
|---|---|---|
| In the money | Strike < Spot | Strike > Spot |
| At the money | Strike = Spot | Strike = Spot |
| Out of the money | Strike > Spot | Strike < Spot |
Premium = Intrinsic value + Time value
At expiry: Time value = 0, so Premium = Intrinsic value
A worked example
USDINR is trading at 83.15. The listed strikes around it are 82.75, 83.00, 83.25 and 83.50. Each contract is USD 1,000.
| Strike | Call | Intrinsic (call) | Put | Intrinsic (put) |
|---|---|---|---|---|
| 82.75 | ITM | 0.40 | OTM | 0 |
| 83.00 | ITM | 0.15 | OTM | 0 |
| 83.25 | OTM | 0 | ITM | 0.10 |
| 83.50 | OTM | 0 | ITM | 0.35 |
No strike is at the money — 83.15 is not a listed strike. The near-the-money strike is 83.25, being 0.10 away rather than 0.15.
In rupees, per contract of USD 1,000:
83.00 call, intrinsic value = 0.15 × 1,000 = Rs 150
83.25 put, intrinsic value = 0.10 × 1,000 = Rs 100
83.25 call, intrinsic value = 0.00 × 1,000 = Rs 0
Now suppose the 83.00 call is quoted at 0.28. Then:
Intrinsic value = 0.15 → Rs 150
Time value = 0.13 → Rs 130
Premium = 0.28 → Rs 280 per contract
And here is the trap in rupees. A trader who bought that 83.00 call at 0.28 is holding an option that is in the money and is nonetheless down Rs 130 a contract. On 20 contracts that is Rs 2,600 of loss on a position the screen is colouring green. His breakeven is 83.00 + 0.28 = 83.28, and the spot is 83.15.
At expiry, if the FBIL reference rate settles at 83.15, the call is cash settled for its intrinsic value of Rs 150 a contract — Rs 3,000 on 20 contracts against Rs 5,600 of premium paid.
Why NISM asks about it
Chapter 4 (Exchange Traded Currency Options), section 4.4, is devoted to moneyness and carries the strike-versus-spot table; section 4.5.1 splits the premium into intrinsic and time value. Between them they generate more questions than almost anything else in the paper.
The standard forms are: given a spot and a strike, classify the call and the put; state which moneyness categories have zero intrinsic value (ATM and OTM); and compute the intrinsic and time components of a quoted premium. Chapter 4 also uses moneyness to set up delta, and Chapter 5 uses it to choose strikes for spreads.
Common exam traps
- Moneyness ignores the premium. ITM does not mean profitable. Profit needs spot beyond strike + premium for a call, or below strike − premium for a put.
- The call and put at one strike are always opposites. If the 83.25 call is OTM, the 83.25 put at the same moment is ITM. They can never both be in the money.
- ATM and OTM options have zero intrinsic value, not zero premium. They still trade, because they carry time value, and that time value is what a spread trader is buying and selling.
- Intrinsic value is floored at zero — never negative. An option "in the money by minus 0.20" is simply out of the money.
- A listed strike rarely equals spot, so "near the money" is the practical category and ATM is the theoretical one. The contract specification guarantees one near-the-money strike, not an ATM one.
- Exchange traded currency options are European and premium style: moneyness during the life tells you what the option is worth, but exercise only happens at expiry, against the FBIL reference rate.
Where this is taught
- Series IV · Chapter 4: Exchange Traded Interest Rate Optionsintroduced here
- Series XIX-B · Chapter 8: Valuationintroduced here
- Series I · Chapter 4: Exchange Traded Currency Optionsintroduced here
- Series V-D · Chapter 21: Exchange Traded Interest Rate Optionsintroduced here
Related terms
- Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
- Currency optionAn option giving the buyer the right, but not the obligation, to buy or sell an agreed amount of one currency against another at a specified exchange rate, on or before a specified future date.
- DeltaThe change in an option's premium for a one-rupee change in the underlying — the first and most used Greek, and the hedge ratio that says how much underlying to hold against an option position.
- OptionA contract giving the buyer the right, but not the obligation, to buy or sell the underlying at a stated price on or before a stated date, in exchange for a premium paid to the writer.
- Protective putBuying a put option to protect a foreign currency receivable: it sets a floor rate (strike minus premium) while keeping the benefit if the currency rises. Suited to contingent cash flows.
- Strike priceThe price fixed in an option contract at which the buyer may buy (call) or sell (put) the underlying if he chooses to exercise — fixed for the life of the contract, unlike the premium.
- Time valueThe part of an option premium that is not intrinsic value — what the buyer pays for the possibility that the underlying moves further in his favour before expiry. It falls to zero on expiry day.
- Option premiumThe price an option buyer pays the seller for the right the contract carries — non-refundable, and made up of intrinsic value plus time value.
- Call optionA contract giving its buyer the right, but never the obligation, to buy the underlying at a fixed strike price — so the loss is capped at the premium and the gain is not.
- Put optionA contract giving its buyer the right, but never the obligation, to sell the underlying at a fixed strike price — insurance against a fall, bought for a premium.
- Premium style optionThe style in which Exchange Traded Interest Rate Options are structured: the buyer pays the full option premium upfront, in cash, to the seller, at the time of the trade.
- Strike price intervalThe fixed gap between consecutive strike prices an exchange lists for an options contract — set at Rs 0.25 for Exchange Traded Interest Rate Options, giving strikes like 99.75, 100.00, 100.25.
- Intrinsic and time valueThe two components of an option's premium — intrinsic value, the amount the option is currently in the money by, and time value, the extra a buyer pays for the chance the option becomes more valuable before expiry.
- Pay-offThe profit or loss on a position at expiry, stated as a function of the settlement price — positive when the trade makes money, negative when it loses.
- Close to the moneyThe band of option strikes clustered around the at-the-money strike which, in Options on Goods, lapse unless the buyer gives an explicit instruction to exercise them.
- Contrary instructionAn instruction from the holder of an in-the-money option telling the exchange **not** to exercise it — the only way to stop an ITM contract being exercised automatically at expiry.
- European-style optionAn option that can be exercised only on its expiry day; the only style permitted for commodity options on Indian exchanges, including options on futures, options on goods and index options.
- Covered short putWriting a put option while holding enough funds to buy the commodity if the put is exercised — a premium-earning strategy, as opposed to a naked short put written without the funds.
- At-the-moneyAn option whose strike price is closest to the spot price, so exercising it immediately would produce neither a gain nor a loss — the strike where the whole premium is time value and uncertainty peaks.
- Out-of-the-moneyAn option that would produce a negative cash flow if exercised immediately — a call with the spot below the strike, or a put with the spot above it. Its intrinsic value is zero and its premium is all time value.
- Futures carry effectThe reason a call on futures carries more intrinsic value than a call on goods, while a put on goods carries more than a put on futures — because before expiry the futures price sits above the spot price.
- Horizontal spreadTwo options of the same type and the same strike but different expiries — a position whose entire value is the difference between the two legs' time values, not a view on direction.
- Diagonal spreadTwo options of the same type on the same underlying with both a different strike and a different expiry — the most complicated of the three spread families, and the only one that varies on both axes.
- Protective callBuying a call option to hedge a foreign currency payable: it caps the purchase rate at strike plus premium, while leaving the importer free to benefit if the currency falls.
- Option buyer maximum riskThe workbook's comparison-table rule that an option buyer's maximum possible loss is capped at the premium paid, unlike a futures position, whose risk equals the full swing in the underlying.
- Wasting assetAn option, whose time value shrinks towards zero every day it is held and is worth nothing at expiry — so an option buyer loses money simply from the passage of time.
- American optionAn option whose holder may exercise it at any time on or before expiry. All exchange-traded index and stock options in India are European style instead — exercisable only on expiry.
- Spot priceThe price at which the underlying asset trades in the cash market for immediate delivery — the anchor from which futures prices, basis, moneyness and final settlement are all measured.