What is the Moneyness of Options?

Moneyness describes the relationship between an option’s strike price and the current price of the underlying asset. The three primary categories of Moneyness are In the Money (ITM), At the Money (ATM), and Out of the Money (OTM).

What is the Intrinsic and Extrinsic Value of Options?

An option premium has two components: intrinsic value and extrinsic value. Together, they determine the option’s market premium. Mathematically, this relationship can be written as follows:

• Option Premium = Intrinsic Value + Extrinsic Value

A) Intrinsic Value

Intrinsic value is the amount an option is in the money (ITM) based on the current spot price. Note that an OTM option has zero intrinsic value. Usually, at expiry:

• Call Intrinsic Value = Max(Spot Price − Strike Price, 0)
• Put Intrinsic Value = Max(Strike Price − Spot Price, 0)

For example, suppose NIFTY is at 25,300, and a 25,000 Call has a premium of ₹450. Now,

• Intrinsic value = ₹25,300 − ₹25,000 = ₹300
• Extrinsic value = ₹450 − ₹300 = ₹150

So, the ₹450 option premium consists of ₹300 intrinsic value + ₹150 extrinsic value.

2. Extrinsic Value

Extrinsic value is the portion of the option premium that represents the possibility of the option gaining additional value before expiry. It is calculated as:

• Extrinsic Value = Option Premium – Intrinsic Value

Generally, as expiry approaches, the time component of extrinsic value declines, and at expiry, an option’s premium consists only of its intrinsic value.

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