Jump to navigation Jump to search “In the money” redirects here. The time value of an option is the chaikin money flow investopedia forex value of the option, less the intrinsic value.
It partly arises from the uncertainty of future price movements of the underlying. A component of the time value also arises from the unwinding of the discount rate between now and the expiry date. An at-the-money option has no intrinsic value, only time value. For example, with an “at the money” call stock option, the current share price and strike price are the same. Exercising the option will not earn the seller a profit, but any move upward in stock price will give the option value. A call option is in the money when the strike price is below the spot price. A put option is in the money when the strike price is above the spot price.
With an “in the money” call stock option, the current share price is greater than the strike price so exercising the option will give the owner of that option a profit. A call option is out of the money when the strike price is above the spot price of the underlying security. A put option is out of the money when the strike price is below the spot price. With an “out of the money” call stock option, the current share price is less than the strike price so there is no reason to exercise the option. The owner can sell the option, or wait and hope the price changes.
This section does not cite any sources. One can also talk about moneyness with respect to the forward price: thus one talks about ATMF, “ATM Forward”, and so forth. JPY is 120, and the forward price one year hence is 110, then a call struck at 110 is ATMF but not ATM. Buying an ITM option is effectively lending money in the amount of the intrinsic value.
Consequently, ATM and OTM options are the main traded ones. S is the spot price of the underlying, K is the strike price, τ is the time to expiry, r is the risk-free rate, and σ is the implied volatility. The forward price F can be computed from the spot price S and the risk-free rate r. There are thus two conventions, depending on direction: call moneyness, where moneyness increases if spot increases relative to strike, and put moneyness, where moneyness increases if spot decreases relative to strike.