Moneyness is the relative position of the price of an underlying asset (i.e. stock) with respect to the strike price of the derivative, most commonly as a call option or a put option.
Moneyness of an option is a classification method where each option/contract gets classified as the following:
- If the derivative would have positive intrinsic value if it were to expire today, it is said to be in the money (ITM).
- If the derivative would be worthless if expiring at its current price, it is said to be out of the money (OTM).
- If the current underlying price and strike price are equal, the derivative is said to be at the money (ATM).
These three classifications helps in determining which particular option to trade for best premium depending upon the market conditions.