Moneyness

Understanding “moneyness” is like understanding "Loch Ness”ness: there’s a lot of mystery to unpack under the surface, and you feel a bit silly doing it. First, you gotta know about trading options. Options are derivative financial securities that give you the *option* to take some sort of action, like buying or selling shares of stock, in a certain time frame. There’s call options, and put options. Call options mean you have the option to buy an underlying stock at a predetermined price (called the “strike price”) by a certain date. Put options mean you have the option to sell an underlying stock at a predetermined strike price by a certain date. Still with us, soldier?

Moneyness compares the strike price to the price of the underlying asset. Basically, moneyness helps options investors figure out if it’s a good idea or not to sell (for put options) or buy (for call options) based on the difference between the strike price and the current price.

Moneyness has some derivative terms itself: In-the-money (i.e. when the call’s strike price is below the current price, opposite for put options), At-the-money (i.e. when the strike price and current price are equal for calls and puts, or almost equal), and Out-of-the-money (i.e. when the call’s strike price is above the current price, opposite for put options). Next time you’re chatting with an options trader, you’ll know what’s up with the mysterious and silly-sounding moneyness.