A:

In the derivatives market, moneyness describes the situation in which a derivative is either in the money, at the money or out of the money. The moneyness of a derivative describes how far away the underlying security's price is from the derivative contract's strike price.

In the stock options market, when the underlying stock's price reaches the option contract's strike price, the stock option is at the money. The intrinsic value of an option dictates the moneyness of an option and whether it is at the money.

What Happens When the Strike Price Is Reached?

For call options, the intrinsic value is the difference between the underlying stock's price and the option contract's strike price. For put options, it is the difference between the option contract's strike price and the underlying stock's price. In the case of both call and put options, if the respective differences between the underlying strike price and stock price value are negative, the intrinsic value is zero.

When an underlying stock's price reaches the strike price, the intrinsic value of the call and put option would be zero.

European-Style Call Option

For example, assume a trader bought one European-style call option contract on stock ABC with a strike price of $50 in May, and the call option contract is set to expire in July. With a European option, the holder of the option could only exercise his contract at the expiration date.

Let's suppose that it's the day that the option contract expires on the third Friday of July. At open, the stock is trading at $49 and is out of the money – it does not have any intrinsic value because the stock price is trading below the strike price. However, at the close of the trading day, the stock price sits at $50.

The option contract has an intrinsic value of zero and is at the money because the stock price is equal to the strike price. Therefore, the option contract expires worthless and is not exercised.

European-Style Put Option

On the other hand, assume another trader bought one European-style put option contract on stock ABC with a strike price of $50 and the put option contract is set to expire in July.

On the day of option expiration, if the stock begins trading at $49, it is considered in the money because it has an intrinsic value of one dollar ($50 - $49) with the stock trading below the strike price. However, let's say that the stock rallies and at the end of the trading day, the stock price closes at $50.

The option contract would have an intrinsic value of zero and is at the money because the stock price is equal to the strike price. Therefore, the put option also expires without being exercised because it does not result in a profit.

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