Near-The-Money

What is Near-The-Money?

Near-the-money means that an option contract’s stock price is close to its strike price. It is used to describe an option’s intrinsic value. An option only has intrinsic value if it is “in-the-money.”

An option is rarely exactly at-the-money; therefore, near-the-money options are used as a proxy.

Types of Options

Call Options

A call option gives the holder of the option the right to purchase the underlying asset at a predetermined date and price.

The predetermined date is referred to as the expiration date or maturity date. The predetermined price at which the holder can purchase the underlying asset is known as the exercise price or the strike price.

Generally, call options should always be exercised at the expiration date if the stock price is above the strike price.

Put Options

A put option gives the holder the right to sell the underlying asset by a predetermined date and price. The predetermined date is referred to as the expiration date or maturity date. The predetermined price at which the holder can sell the underlying asset is known as the exercise price or the strike price.

Popular Terminology in the Option Market

There are three primary descriptions of the positioning of the stock price relative to its strike price.

1. In-the-Money
2. At-the-Money
3. Out-of-the-Money

When is an Option In-the-Money?

• A call option is referred to as in-the-money when the stock price is greater than the strike price in the contract. In-the-money call options have intrinsic value.
• A put option is referred to as in-the-money when the stock price is less than the strike price in the contract. In-the-money put options have intrinsic value.
• Assuming that there are no transaction costs, an in-the-money option will be exercised at expiration if it has not already been exercised.

When is an Option At-the-Money?

• Call and put options are referred to as at-the-money when the stock price is equal to the strike price in the contract. At-the-money options possess no intrinsic value.

When is an Option Out-of-the-Money?

• A call option is out-of-the-money if the stock price is less than its strike price. Out-of-the-money call options have no intrinsic value.
• A put option is out-of-the-money if the stock price is more than its strike price. Out-of-the-money put options have no intrinsic value.

Practical Application of Near-the-Money Options

Near-the-money options are commonly utilized in option trading strategies that involve trading a combination of options, zero-coupon bonds, and stocks. Common option trading strategies that involve near-the-money options include:

• Butterfly spreads
• Neutral calendar spread

A butterfly spread requires the trader to take positions in options with three different strike prices. The strategy generally involves buying a European call option with a strike price below the stock price, buying a European call option with a strike price above the stock price, and selling two European call options with a strike price that is near-the-money.

It requires a small initial investment and results in the greatest possible payoff when the two sold European call options are at-the-money at expiration.

A neutral calendar spread can be created by selling a European call option with a strike price that is near-the-money and buying a longer-maturity European call option with a strike price that is also near-the-money.

The strategy’s initial cost increases depending on how long the time to maturity is. Profit is maximized if the stock price expires at-the-money.

More Resources

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Options: Calls and Puts
• Intrinsic Value
• American vs European vs Bermudan Options
• Stock Option
• See all derivatives resources