What is Moneyness?
Moneyness is a description of a derivative relating its strike price to the price of its underlying asset. Moneyness describes the intrinsic value of an option in its current state. The term moneyness is most commonly used with put and call options and is an indicator as to whether the option would make money if it were exercised immediately. Moneyness can be measured with respect to the underlying stock or other asset's current/spot price or its future price.
BREAKING DOWN Moneyness
Moneyness tells option holders whether exercising will lead to a profit. There are many forms of moneyness, including in, out or at the money. Moneyness looks at the value of an option if you were to exercise it right away. A loss would signify the option is out of the money, while a gain would mean it's in the money. At the money means that you will break even upon exercising the option.
Example of Moneyness
If the current price of XYZ stock is $50, a call or put option with a strike price of $50 would be at the money. Exercising the option would result in a breakeven for the investor. A put with a strike price of $75 would be in the money because it would allow the holder of the put to sell the stock for a higher price than it is currently trading. On the other hand, a call with a strike price of $75 would be out of the money because there is no reason the holder of a call would want the opportunity to purchase XYZ stock for $75 when they could get it on the open market for $50.