When investing in stocks and shares, you have many different words to learn. Options Moneyness is a common term, but few people actually fully understand what it really means. If you ask three different people what the term means, then it’s very likely that you will get different answers.
What does it mean?
This article will look at exactly what Options Moneyness actually means. The article will also look at what implications the term has on your trading.
Moneyness actually means the current profitability of the option. There are some common phrases including at the money, out of the money and in the money. These all relate to different states of profitability.
The different states of moneyness will be looked at in more detail later. Before we do this, we will spend some time looking at what is included with the options price quote.
Option Price Elements
The options quote contains lots of information, including the name of the company of the options, the expiration date, the strike price, the type of option, and the premium. The premium is the price that the buyer needs to pay for the right to exercise the option, but remember they are not obliged to act on the action.
The Options Premium
The options premium is made up of two separate values; these are the time value and intrinsic value. The intrinsic value is the amount of profit a buyer could hope to make if they exercised the right of the option, received the asset, and then sold it at the current market price.
The time value will decay over time and become 0 at the expiration date of the option. This is calculated by taking the intrinsic value away from the options premium.
Sometimes the best way of understanding terms is to look at real world examples. Some of these are mentioned below:
In The Money
If you think that Apple is currently undervalued in October, then you may want to buy an Apple call option for November expiry. The premium of the option is currently 28, Apple stock is currently said to be trading at 280. This means that the intrinsic value of the option would be 20; this means that the time value is $8.
This option is explained as being in the money because it has positive intrinsic value. This means that an option in the money is an option which has a strike price below the current market price. In this case it makes more sense to sell the call option than take delivery because you will get more money per share than if you actually took delivery.
The opposite of a share in the money is one out of the money. This would happen if don’t have any intrinsic value. The intrinsic value of a put option will be calculated by taking the market value away from the strike price. If the strike price was 250, and the market value was 280, then the intrinsic value would be calculated as -30. In the real world though, the intrinsic value cannot be any lower than 0.
Another term is at the money. This would happen if Apple had a current market price of 300. This would mean that the intrinsic value would be 0, and so said to be at the option. This would mean that exercising the option now would not provide you with any profits. This doesn’t mean that it is worthless though, because there could still be some time value.
By understanding some of the basic terms like Options Moneyness, you will find it much easier to profit from your investments. If you are planning on trading options, then you should research this in more detail.
A good way of learning much more about options is to sign up for a virtual practice account with optionsxpress. This allows you to practice your knowledge and see whether or not you are able to profit from your skills.