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. Near-the-money is nearly synonymous with at-the-money, a scenario where the underlying asset’s price is very close to, but seldom exactly at, the strike price.
When an option’s strike price closely aligns with the market price of the underlying asset, it is identified using terms like “near the money” or “close to the money.” Despite being almost “at the money” (ATM), it slightly differs.
A call option is considered “in the money” (ITM) if its strike price is lower than the market price. Conversely, if the strike price is higher than the market price, it would be “out of the money” (OTM). The meaning of these terms reverses for put options. Before being deemed in-the-money, the option’s premiums must also be considered. Near the money represents one of the states of option moneyness, along with in-the-money and out-of-the-money.
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Key Highlights
- A near-the-money option is one whose strike price is close to, but not exactly at, the current market price.
- Near the money is a state of option moneyness, just like at-the-money (ATM), in-the-money (ITM), and out-of-the-money (OTM).
- A contract near the money is on the verge of being at-the-money but slightly ITM or OTM.
Understanding Near the Money
An options contract can be considered “near the money” when the strike price is close to but differs slightly from, the price of the underlying security. Typically, if the difference is less than a given threshold (often around 50 cents), it is deemed near the money.
For example, imagine an option with a current market price of $20 and a strike price of $19.80 - the small difference of 20 cents qualifies it as near the money.
A contract is considered “at the money” when the strike price exactly matches the market price of the underlying security. It’s rare for this exact alignment, so “near the money” is a practical substitute. Consequently, options trading frequently involves near-the-money options rather than at-the-money ones.
At or near-the-money option contracts often carry higher premiums than out-of-the-money options, where the instrument’s price diverges more significantly from the strike price. These near-the-money options inherently offer intrinsic value if marginally out of the money and contain both intrinsic and extrinsic value if slightly in-the-money.
Near the Money vs. At the Money
Due to the infrequent exact price matches, nearly all at-the-money trades occur as near-the-money transactions. Most traders prefer trading when options are ITM to pay below market rates and generate profit.
When options are at the money, their delta value is commonly 0.5 or -0.5 for puts. This delta indicates equal chances of becoming ITM or OTM by the contract’s expiration. The delta for near-the-money options will vary, higher or lower, depending on their proximity to the strike price.
Invest wisely! Exploring near-the-money options can complement your trading strategy effectively.
Related Terms: At the Money, In the Money, Out of the Money, Options Premium.
