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.

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.

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

Suppose it is the third Friday of July, when his option contract expires. At the open of the trading day, 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 closes at $50.

The option contract has an intrinsic value of $0 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.

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 expiring in July. Suppose it is the third Friday of July when his option contract expires.

At the open of the trading day, the stock is trading at $49 and is in the money because it has an intrinsic value of $1 ($50-$49) because the stock price is trading below the strike price. However, the stock rallies and at the end of the trading day, the stock price closes at $50. The option contract has an intrinsic value of $0 and is at the money because the stock price is equal to the strike price. Therefore, the put option also expires worthless and is not exercised because it does not result in a profit.

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