# Moneyness Of Options – The Relationship Between Exercise Price & Price Of Underlying Security

The term “moneyness” is used to describe the relationship between the exercise price of the option contract and the price of the underlying security. The moneyness of equity or ETF options can be further classified into 4 categories. The equity or ETF options can be classified as :

• In The Money Options
• At The Money Options
• Out Of The Money Options
• Near The Money Options

A table below categorises the the moneyness of an option based on the price of the underlying security and the strike price.

 Moneyness Call Option Put Option In The Money(ITM) Options Price Of Underlying > Strike or Exercise price Price of Underlying < Strike or Exercise price At The Money(ATM) Options Price Of Underlying = Strike or Exercise price Price Of Underlying = Strike or Exercise price Out Of The Money(OTM) Options Price Of Underlying < Strike or Exercise price Price Of Underlying > Strike or Exercise price Near The Money Options Price of underlying security is near but not equal to the strike price of the option. Price of underlying security is near but not equal to the strike price of the option.

The best way to actually understand this is to look at a real life example.

These are November 2015 options for a company called Lions Gate Entertainment. At the time of this writing, it is trading at a price of \$38.88.

The underlying security in this case is the stock of Lions Gate Entertainment.All of the call option contracts with exercise prices of \$38 and less are in the money options. All of the call options at exercise prices of \$39 or more are out of the money call options.

All put option contracts with exercise prices of \$39 or more are in the money options. All put options with exercise prices of equal to \$38 or less are out of the money put options.

If the exercise price of an options contract is equal to the underlying security price, then that options contract is an at the money options contract.

The call options contract with a exercise price of \$39 is termed as “near the money” or “close to the money” options contract.( You can expand the diagram above)

The put options contract with a strike(exercise) price of \$38 is also termed as “near the money” or “close to the money”.

Typically, near the money or at the money option contracts are more expensive than out of the money option contracts because there is a higher likelihood of it becoming an in the money options contract. The increased trading activity around at the money and near the money option contracts causes the option premiums of these contracts to be relatively higher than out of the money option contracts.

Practical tips

If you find all of this mind boggling, take it easy and don’t sweat it! A good guide to refer to is always the options chain. Typically, certain websites such as www.marketwatch.com make it easier for a trader to tell if an options contract is in the money or out of the money. They do so by shading the in the money contracts to make it stand out visually to the reader.

The whole idea at the end of the day is to buy low and sell high. You’d want to buy an option for as cheap as possible and hope that it will end up deep in the money with a huge move by the underlying security such that your option premium will increase. Thereafter, you sell your option for a healthy profit.