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Calculating Options Moneyness & Intrinsic Value
Value of an Option
When traders talk about the value of an option contract, they tend to use a common set of terms to describe the varying levels of an option contract. The terms they use are time until expiration, time value, intrinsic value, and moneyness.
Moneyness is a term to describe whether a contract is either “in the money”, “out of the money”, or “at the money”.
A call option is said to be “in the money” when the future contract price is above the strike price. A call option is “out of the money” when the future contract price is below the strike price.
DID YOU KNOW? - Approximately 20% of the total volume at CME Group is Options Volume. This is impressive given that options have been around only about 35 years while futures have a much longer history—150 years.
For a put option, the contract is said to be “in the money” when the future contract price is below the strike price, and “out of the money” when it is above the strike price. The term “at the money” refers to the strike that is closest to the underlying futures contract. When this happens both the call and the put option will be “at the money” at the same time.
The terms “in the money” and “out of the money” refer to the option contract itself and do not represent the profitability of your trade, nor does it depend on whether you have bought or written the option.