Key Takeaways
- Strike price very close to current market price.
- No intrinsic value; higher extrinsic value.
- Balanced risk with sensitivity to small price moves.
- Ideal for short-term trades due to good liquidity.
What is Near the Money?
Near the money (NTM) refers to options contracts where the strike price lies very close to the current market price of the underlying asset, balancing affordability with sensitivity to price changes. Unlike call options that are in-the-money, NTM options do not have intrinsic value but carry significant extrinsic value due to their proximity to the spot price.
This concept is important because it affects how options are priced and traded, impacting your strategy when considering contracts near the current market range.
Key Characteristics
Understanding the main traits of near-the-money options helps you evaluate their role in trading.
- Strike Price Proximity: The strike price is typically within a small percentage or less than $0.50 from the current asset price.
- Extrinsic Value: These options have no intrinsic value but higher time value and volatility premium compared to deep out-of-the-money options.
- Delta Sensitivity: Near-the-money options have a delta close to 0.5, meaning their price moves moderately with the underlying asset.
- Liquidity: Often more liquid than deep out-of-the-money or far in-the-money contracts, facilitating easier entry and exit.
- Balanced Risk/Reward: They offer a middle ground between cost and potential profitability, suitable for moderate price movements.
How It Works
Near-the-money options gain value primarily through extrinsic factors such as time decay and implied volatility rather than intrinsic profitability. Their strike prices lie close enough to the current market price that even minor favorable movements can push them into in-the-money territory.
For example, if you hold a near-the-money option on a stock like Apple, small price increases can rapidly increase the option’s value. This makes them ideal for traders expecting modest price changes, but they carry the risk of expiring worthless if the underlying price remains stagnant or moves against you.
Examples and Use Cases
Near-the-money options serve various purposes across market sectors and strategies.
- Technology Stocks: A call option on Apple with a strike price just above the current market price is near the money and sensitive to price shifts driven by product launches or earnings announcements.
- Automotive Sector: A put option on Tesla near the money can be used to hedge against small declines or speculate on volatility ahead of quarterly results.
- Range Trading: Traders use near-the-money options within a specific range to capitalize on expected sideways price action with limited risk.
Important Considerations
When trading or investing in near-the-money options, consider their sensitivity to volatility and time decay, which can erode extrinsic value rapidly as expiration approaches. Managing these factors is crucial to avoid losses despite favorable underlying price movements.
Additionally, understanding related concepts like naked options can help you better assess risk exposure and position sizing in your portfolio.
Final Words
Near-the-money options strike a balance between cost and responsiveness to price changes, making them suitable for traders aiming to capitalize on moderate moves. Review current market prices against strike prices to identify NTM opportunities that fit your strategy.
Frequently Asked Questions
Near the Money (NTM) options have strike prices very close to the current market price of the underlying asset. They offer a balance between affordability and sensitivity to price changes but do not have intrinsic value.
NTM options have strike prices close to the market price without intrinsic value, while In-the-Money (ITM) options have favorable strike prices with intrinsic value. Out-of-the-Money (OTM) options have strike prices that are less likely to be profitable at expiration.
Because NTM options are close to becoming profitable, their extrinsic value—which includes time value and volatility premium—is higher. This is due to the greater chance that small price movements can push them In-the-Money before expiration.
Near the Money is often used interchangeably with At the Money since exact strike price equality with the market price is rare. Both refer to options with strike prices very close to the current asset price.
NTM options offer a moderate premium cost and good liquidity, making them ideal for short-term trades. Their sensitivity to small price moves allows traders to potentially profit from minor favorable changes in the underlying asset.
NTM options have a balanced risk and reward profile. They are sensitive to small price movements, offering profit potential, but they also carry the risk of expiring worthless if the underlying asset price doesn't move favorably.
If Apple (AAPL) trades at $150, a call option with a $152 strike price would be Near the Money. If the stock rises to $153 before expiration, this option would then become In-the-Money with $1 intrinsic value.
