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How to Determine Option Moneyness?

How To Determine Option Moneyness?

Options can be used in a variety of vehicles to help investors realize their investment objectives. The financial world has several tools to analyze the effectiveness of a particular option to reach these goals. One such tool is option moneyness, which helps investors analyze and determine how “in the money” or “out of the money” a particular option is at a given point in time.

Option Pricing

Options pricing incorporates several factors to calculate a fair and reasonable value for a range of options. This range of options can include buying a call option, which is the right to buy an underlying security, or buying a put option, the right to sell an underlying security.

In The Money

Options pricing includes several components to arrive at a fair value. Investors must consider things like the price of the option, the time to expiration for the option and the underlying price. When the underlying price is greater than the strike price of a call option, then the option is said to be in the money. Conversely, when the underlying price is less than the strike price of a put option, the option is said to be in the money.

Out of Money

Options pricing uses other components to generate a fair value. Investors must also consider variables like implied volatility, delta, gamma, rho and theta. When the underlying price is less than the strike price of a call option, the option is said to be out of the money. Conversely, when the underlying price is greater than the strike price of a put option, the option is said to be out of the money.

In Between The Money

Depending on the options pricing model used, this can result in options that are in between in the money and out of the money. When options are in between in the money and out of the money these are referred to as at the money options. In the example of a call option, when the underlying price is equal to the strike price then it is said to be at the money.

MarketXLS

Understanding option moneyness can be beneficial for investors to help avoid being on the wrong side of any option play. The complexities of options pricing can be daunting, especially for novice investors. MarketXLS provides a platform that can be used to streamline your option analysis and help construct and monitor options strategies. Ultimately, MarketXLS can help prepare investors of the years ahead and the gains they can rack in during the different market conditions.

Here are some templates that you can use to create your own models

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Implied Volatility Screener