Near-The-Money

What Is Near The Money?

Near-the-money refers to the actual value of an options contract, where the stock value is close to the strike price.

The term has important implications and applications in investing and considering various options.

Options are financial contracts that give a buyer the right, but not the obligation, to buy or sell an asset at its strike price. They (the options) can be “in/at the money” (ITM), “out of the money” (OTM), or “close to/near the money” (NTM).

The phrase “near the money” or NTM is derived from when an option has a lower strike price than the market value yet is still close to the market price.

For example, suppose there is a call option with a current market value of $25 and a strike price of $24.70. This would be deemed “near the money” since the difference between the strike price and market value is 30 cents, which is less than the usually taken benchmark of 50 cents.

Options have three criteria:

In/at the money: where the strike price is lower than the market value.
Near the money: close to “at the money” but often slightly in/out, where the strike price is lower than the market value.
Out of the money: where the strike price exceeds the market value.

When the strike price is lower than the market value, it is “in the money”. On the flip side, when the strike price is higher, the option is said to be “out of the money”, since it is higher than the market price's value.

Those options are considered high-risk, high-reward products and should be used by individuals with a high-risk tolerance and understanding of the stock market and its offerings.

Becoming familiar with these concepts helps investors understand an asset's position relative to the strike price, aiding in better investment decision-making. When trading, an option’s value can increase with time, and so, the premium when trading factors in with the current time value.

That being said, if the particular option were exercised instantly, the individual would not make a profit since the option was still “out of the money.”

“Near the money" should not be mistaken for “near money”, which describes assets that can quickly and easily be transformed into cash.

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"Near the money" refers to options contracts where the strike price is close to the current market price of the underlying asset, indicating that the option is close to being in the money.
Near-the-money options are significant for traders because they are more likely to become profitable if the market price moves favorably, making them attractive for speculative and hedging strategies.
These options typically exhibit higher premiums than out-of-the-money options due to their increased likelihood of expiring in-the-money, reflecting the higher risk and reward potential.
Traders use near-the-money options for strategies like straddles and strangles, which benefit from significant price movements in either direction and for writing covered calls or putting into collecting premium income.

Understanding Near the Money

Sometimes, investors use the concepts of “near the money” and “at the money” similarly because options’ strike prices rarely coincide with the market value. This explains why traders utilize this notion and “near the money” options.

Options can be categorized as call and put options. Call options are near or “in the money” if the strike price is lower than the market price. On the other hand, if the strike price is higher, the option would be “out of the money.” For put options, it works in the opposite direction.

Some call options typically come at higher prices than options that are “out of the money”; thus, call options come with the notion of good ROI or return on investment.

A call option is considered "in the money" if its strike price is lower than the market price. However, if the strike price is higher than the market price, it would be "out of the money." A put option's moneyness would work in the opposite direction.

When an option is “near/at the money,” traders will pay less than the current market value.

Near the Money vs. At the Money

The prices of options rarely precisely match that stock's exact strike price. As a result, almost all options considered “at the money” will occur “near the money.”

When an option is “in the money,” traders pay the price lower than the current market value for that stock and thus make a greater profit. This is why many traders choose, or at least try to, trade options ITM.

When options are perceived to be at the money, they have a delta value of +/- 0.5 for put options. So, the option has an equal chance of being out of or in the money when the options contract expires.

Note

There is no explicitly stated or exact value for an option to be considered near the money, with that being said, although “near” can be debated, near the money is usually viewed to be a difference of fewer than 50 cents between the options’ strike price and the market price.

The distance between the value of the options near the money and the strike price determines whether those options will have a higher or lower delta value.

Near-The-Money FAQs

When should I buy out of the money?

Traders that are confident that a stock’s value will increase substantially could consider buying the out-of-the-money call option.

When the price is expected to increase significantly, out-of-the-money options perform better.

However, if the expected increase is relatively small, at or in-the-money options may be better choices.

Why do people buy and sell with money?

Deep-in-the-money options have lower risks since the investor has the opportunity to obtain a profit that is at the same or similar level to the short sellers of the stock, even though the investors paid less.

Selling in the money is beneficial because traders can choose to sell the stock when the current market value is higher than the strike price in the case of a call option and make a profit.

Why do options traders make a lot of money?

Option contracts usually represent a certain amount of shares of the stock, and so controlling growing stocks allow traders to profit more than purchasing individual shares as they can increase in value over time if the company performs well.

Over time, if the growth stock increases, traders can take advantage of that and sell their options at a high profit.

Why are most options near the money?

Options prices rarely match the exact strike price for a particular stock. Therefore, most options take place near the money for trades that take place at the money.