‘Near the Money’ Definition

Commodity Trading Advisor (CTA)

What is close to money?

“Near the money” refers to an option contract whose exercise price is close to the current market price of the corresponding underlying security. “Near money” is an alternative expression, designating the same situation. While a call option can be considered “in the money” if its exercise price is lower than the market price, the option is considered close to money if its exercise price is lower than the market price. market but extremely close to it. However, if the strike price is higher than the market price, it is considered out of money. Close to money is one of the three states of the monetary option, with money and out of money.

Key points to remember

  • “Near the money” refers to an option contract whose exercise price is close to the current market price of the corresponding underlying security.
  • An option contract would be “close to the money” when the exercise price or the price at which the option can be exercised and the price of the underlying security are close.
  • A contract is considered “to the money” when the exercise price is equal to the market price of the underlying security.

The basics of quasi-money

An option contract would be “close to the money” when the exercise price or the price at which the option can be exercised and the price of the underlying security are close. Although there is no official figure to “close”, if this difference is generally less than 50 cents, the options contract is considered close to cash. For example, an option with a current market value of $ 20 and an exercise price of $ 19.80 would be considered close to cash, since the difference between the exercise price and the market value is only 20 cents.

A contract is considered “to the money” when the exercise price is equal to the market price of the underlying security. The term “close to the money” is often used to mean the same thing as “to the money” because it is rare that the price of options is at the money, or the same as the exercise price, of the product in question. For this reason, options trading almost always uses near the money or the closest to monetary options rather than monetary options.

The money options contract or near it usually costs more (i.e. it has a higher premium) than money options, in which the price of the underlying instrument is significantly higher or lower than the exercise price. Near-the-money options contain intrinsic value if they are slightly out of the money, but can contain both intrinsic and extrinsic value if they are slightly in the money.

Near money vs money

Since it is so rare that an option price aligns exactly with the strike price of this stock, almost all currency options trading will take place close to the money. Most traders try to trade options when they are in the money so that they can pay less than the current market value of the stock and make a profit. When cashed, options have a delta value of 0.5 or -0.5 for put options. This means that the option is also likely to end up out of the money or in the money by the time the options contract expires. Options close to money will have a higher or lower delta value, depending on their proximity to the strike price.

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