is a measure of the degree to which an derivative security
is likely to have positive monetary value at its expiration. An option
if the strike
of the option is the same, or about the same, as the current price of the underlying security on which the option is on. An out-the-money
option currently has no intrinsic value - e.g. a call option
is out-the-money if the strike is higher than the current underlying price. An in-the-money
option conversely does have intrinsic value. The strike of an in-the-money call option is lower than the current underlying price.
For example suppose the current stock price of IBM is $100. A call or put option struck at $100 is at-the-money. A call option struck at $80 is in-the-money. A put option struck at $80 is out-the-money. Conversely a $120 strike call option is out of the money and a $120 strike put option is in the money.
When working with the Black-Scholes model moneyness may be defined quantitatively. If we define the moneyness as
where and are the standard Black-Scholes parameters then
This choice of parameterisation means that the moneyness is zero when the forward/underlying price matches the strike after discounting at the risk-free rate. Moneyness is measured in standard deviations from this point, with a positive value meaning an in-the-money option and a negative value meaning an out-the-money option.