What Is 'Near the Money'?
Let me explain what 'near the money' means in options trading. It's a term for an options contract where the strike price is close to the current market price of the underlying security. You can think of it as basically the same as 'at the money,' since it's rare for the prices to match exactly. The strike could be a bit higher or lower, and that's fine—'close to the money' is another way to say it. This puts it very near to being at the money (ATM), but not quite there.
For calls, if the strike is below the market price, it's in the money (ITM); if above, it's out of the money (OTM). Puts work the opposite way. Remember, you have to factor in premiums to truly call it in the money. Near the money is just one category of moneyness, alongside ITM, OTM, and ATM.
Key Takeaways
- A near-the-money option has a strike price close to, but not exactly at, the underlying's current price.
- It's one of the moneyness states, including at the money (ATM), in the money (ITM), and out of the money (OTM).
- Such a contract is slightly ITM or OTM, close to being ATM.
Understanding Near the Money
When I talk about an options contract being near the money, I'm referring to a situation where the strike price—the price at which you can exercise the option—is close to the underlying security's current price. There's no strict definition of 'close,' but typically, if the difference is under 50 cents, it qualifies. Take an example: if the market value is $20 and the strike is $19.80, that's near the money with just a 20-cent gap.
An at the money contract happens when the strike exactly matches the market price, but that's uncommon. That's why 'near the money' often stands in for 'at the money' in trading. You'll find that options trading mostly involves near-the-money or nearest-the-money options rather than perfect ATM ones.
These near-the-money options usually have higher premiums than out-of-the-money ones, where the underlying's price is way off from the strike. If slightly out of the money, they might have intrinsic value; if slightly in, they can have both intrinsic and extrinsic value.
Near the Money vs. At the Money
Given how seldom an option's price lines up perfectly with the strike, most so-called at-the-money trades are actually near the money. Traders like you often aim for in-the-money options to buy below market price and profit, but near the money has its place.
At exactly the money, options have a delta of 0.5 (or -0.5 for puts), meaning a 50/50 chance of ending ITM or OTM by expiration. For near-the-money options, the delta shifts higher or lower based on how close it is to the strike.
Fast Fact
Keep in mind, this information isn't tax, investment, or financial advice. It's general and doesn't consider your specific objectives, risk tolerance, or situation—it might not suit everyone. Investing carries risks, including potential loss of principal.
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