There are three types of moneyness:

1. In the money (ITM): The option is profitable because the strike price is more favorable than the spot price. For a call option, the strike price is above the spot price, while for a put option, the strike price is below the spot price.

2. Out of the money (OTM): The option is unprofitable because the strike price is less favorable than the spot price. For a call option, the strike price is below the spot price, while for a put option, the strike price is above the spot price.

3. At the money (ATM): The strike price is equal to the spot price, making the option neither profitable nor unprofitable.

Understanding moneyness is essential for traders to assess the value of their options contracts and make informed trading decisions.

An option is in-the-money (ITM) if exercising it would result in a profit. For a call option, the strike price must be below the spot price, while for a put option, it must be above. Out-of-the-money (OTM) means exercising the option would result in a loss. At-the-money (ATM) means the strike price equals the spot price. Since call and put options have opposite positions, an ITM option for one trader is OTM for the other. The option writer's status is the opposite of the holder's. The total wealth among traders remains the same at expiry. 

The relationships between the strike price, spot price, and moneyness for both call and put options. 

To summarize:

• In-the-money (ITM):

  • Call option: Strike price < Spot price

  • Put option: Strike price > Spot price

• Out-of-the-money (OTM):

  • Call option: Strike price > Spot price

  • Put option: Strike price < Spot price

• At-the-money (ATM):

  • Strike price = Spot price

It is important to note that options trading is a zero-sum game, where one trader's profit is equal to another trader's loss. The moneyness of an option contract is reversed for the option holder and writer, and both parties will experience opposite outcomes. 

Why is moneyness important? 

 Moneyness is crucial in options trading as it determines the profitability of an option contract. Understanding moneyness helps traders:

1. Choose the right option

2. Assess intrinsic value (profit potential)

3. Make informed decisions

Moneyness categorizes options into:

1. In-the-money (ITM): Profitable, with intrinsic value

2. Out-of-the-money (OTM): Unprofitable, with no intrinsic value

3. At-the-money (ATM): Neutral, with no intrinsic value

The relationship between holders and writers of call and put options is inverse, meaning one's gain is the other's loss. Moneyness changes as the underlying stock price fluctuates, and options can be deep-in-the-money or deep-out-of-the-money. Finally, due to costs, options rarely expire exactly "at-the-money".