What Is "Near the Money"?
The phrase "near the money" refers to an options contract whose strike price is close to the current market price of the corresponding underlying security. "Close to the money" is an alternative phrase, designating the same situation. It is very close to being "at the money"(ATM), but not quite the same.
A call option is considered "in the money" (ITM) if its strike price is lower than the market price, the option is considered near the money if its strike price is lower than the market price but extremely close to it. However, if the strike price is higher than the market price, it would be "out of the money" (OTM). A put option's moneyness would work in opposite direction.
Near the money is one of the states of option moneyness, along with in the money and out of the money (OTM).
- A near the money option is one whose strike price is close to, but not at, the current underlying price.
- Near the money is one of the states of option moneyness, along with at the money (ATM), in the money (ITM), and out of the money (OTM).
- A contract that is near the money is close to being at the money but will be slightly ITM or OTM.
Understanding Near the Money
An options contract is said to be "near the money" when the strike price, or the price at which the option can be exercised, and underlying security's price are close. While there is no official figure for "close," if that difference is usually less than 50 cents, the options contract is considered near the money. For example, an option with a current market value of $20 and a strike price of $19.80 would be considered near the money, as the difference between the strike price and the market value is only 20 cents.
A contract is considered "at the money" when the strike price is equal to the market price of the underlying security. The term “near the money” is often used to mean the same thing as “at the money,” because it is rare for options prices to be at the money, or the same as the strike price, of the commodity in question. For this reason, options trading almost always uses near the money or nearest the money options rather than at the money options.
At or near the money options contract typically cost more (i.e., they have a higher premium) than out of the money options, in which the underlying instrument's price is significantly higher or lower than the strike price. Near the money options contain intrinsic value if they are slightly out of the money, but can contain both intrinsic and extrinsic value if they are slightly in the money.
Near the Money vs. At the Money
Since it is so rare for an options price to line up exactly with the strike price for that stock, almost all at the money options trades will take place near the money instead. Most traders attempt to trade options when they are in the money so that they can pay less than the current market price for the stock, and make a profit.
When at the money, options have a delta value of 0.5 or -0.5 for put options. This means that the option is equally likely to either end up out of the money or in the money by the time the options contract expires. Near the money options will have a higher or lower delta value, depending on how close they are to the strike price.