Moneyness

In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a three-fold classification: if the derivative would have positive intrinsic value if it were to expire today, it is said to be in the money; if it would be worthless if expiring with the underlying at its current price it is said to be out of the money, and if the current underlying price and strike price are equal, it is said to be at the money. There are two slightly different definitions, according to whether one uses the current price (spot) or future price (forward), specified as "at the money spot" or "at the money forward", etc.

This rough classification can be quantified by various definitions to express the moneyness as a number, measuring how far the asset is in the money or out of the money with respect to the strike – or conversely how far a strike is in or out of the money with respect to the spot (or forward) price of the asset. This quantified notion of moneyness is most importantly used in defining the relative volatility surface: the implied volatility in terms of moneyness, rather than absolute price. The most basic of these measures is simple moneyness, which is the ratio of spot (or forward) to strike, or the reciprocal, depending on convention. A particularly important measure of moneyness is the likelihood that the derivative will expire in the money, in the risk-neutral measure. It can be measured in percentage probability of expiring in the money, which is the forward value of a binary call option with the given strike, and is equal to the auxiliary N(d2) term in the Black–Scholes formula. This can also be measured in standard deviations, measuring how far above or below the strike price the current price is, in terms of volatility; this quantity is given by d2. (Standard deviations refer to the price fluctuations of the underlying instrument, not of the option itself.) Another measure closely related to moneyness is the Delta of a call or put option. There are other proxies for moneyness, with convention depending on market.