When you’re talking about moneyness in options, certain phrases capture where the strike price is in relation to the current price of the underlying asset.
Options are either in-the-money (ITM), out-of-the-money (OTM), at-the-money (ATM), or near-the-money. You can also have options that are deep-in-the-money or far-out-of-the-money.
Generally, a call option is in-the-money when the strike price is below the underlying asset price while a put is ITM when the strike price is above the underlying asset price. You flip the relationship for out-of-the-money options: an OTM call’s strike price is above the underlying stock price while an OTM put’s strike price is below the stock price.
What Is Moneyness?
The moneyness of an option describes the relationship between the strike price of an options contract and the price of the underlying shares. To explain the strike price: it refers to the price at which an investor can buy or sell a derivative contract.
Option moneyness can change depending on how the stock price moves. For example, a call option can be out-of-the-money one day, but then a share price appreciation can result in that same call turning in-the-money the next day.
Moneyness may also change on a minute-by-minute basis depending on the price fluctuations in the underlying stock.
Moneyness of options can be used to construct your options trading strategy — e.g. going long or short options, purchasing puts or calls, and executing more sophisticated options strategies.
How Does Moneyness Work?
Understanding the moneyness of an option is important for different core options trading strategies. As explained earlier, moneyness works by comparing the strike price of an option to the market price of the underlying shares.
Because options are complex, it’s also important to know options terminology.
- An in-the-money (ITM) option has intrinsic value and time value.
- An out-of-the-money (OTM) option only has time value, and thus is worthless if exercised.
- OTM options have zero intrinsic value and thus are cheaper than in-the-money options.
- At-the-money (ATM) options are rare since it might only occur for a moment when the stock price equals a specific strike price — near-the-money options are more common.
- A near-the-money option has a strike closest to the underlying share price on an options chain.
Practically speaking, if you are very bullish on a stock, you might consider purchasing out-of-the-money call options since those would appreciate the most on a percentage basis if there is a sharp share price rise. They also drop the most if the price moves against you.
If you expect just a small move on a stock, in-the-money options are probably the better play. And due to the leverage in options ITM will provide higher returns/losses than available by purchasing the underlying stock.
The deeper in-the-money an option is, the greater the sensitivity it will have to movements in the underlying shares.
Understanding Intrinsic and Time Value of Options
What’s the difference between intrinsic value and time value? It’s important to understand how these two factors play into the value of options.
The intrinsic value of an in-the money call option is simply the price of the stock less the strike price of the option. The intrinsic value of an in-the money put is the strike price of the option less the price of the stock.
The difference between the intrinsic value and the actual current price of the option is time value. Options that are in the money always have intrinsic value. Out-of-the-money options have no intrinsic value, but they might have time value.
The drivers of time value are complex and include many factors. If you’re looking for more information, you should consider learning about the option Greeks to inform your trading strategy.
Types of Moneyness
An option can be categorized in four common ways with respect to the relationship with its strike price and underlying share price: in-the-money, out-of-the-money, at-the-money, and near-the-money. Understanding how option pricing works between in-the-money vs. out-of-the-money options is important.
In-the-Money (ITM)
In-the-money options are those that have intrinsic value. For a call option, that means the underlying stock price is above the option’s strike price. A put option is in-the-money when the stock price is below the strike price.
If a call option is in-the-money, you can exercise the option, receive shares at the strike price, then immediately sell the shares in the market. In-the-money puts allow the option holder to sell a stock at a higher price compared to the market price of the security. Long calls are usually used to place bullish bets on a stock while long puts are generally used when a trader is bearish.
In-the-money options, while having intrinsic value, also have a degree of time value. It is often advantageous for an options trader to exit the trade in the market rather than exercising immediately.
Options that can be exercised at any time before expiration are known as American Style options. Options that can only be exercised upon expiration are European Style. There are other differences between American and European options but the different exercise options are most relevant to this discussion.
Out-of-the-Money (OTM)
An out-of-the-money call option is one in which the strike price is above the underlying stock price. The owner of a call option hopes that the share price rises prior to expiration so that the option has intrinsic value. The seller of a call option benefits when the underlying stock price remains below the exercise price so they can keep the premium they collected when they sold to open the call.
Puts are out-of-the-money when the strike price is below the market price of the underlying shares. The owner of puts is bearish on the stock, so they want the stock to fall below the strike price so that the puts become in-the-money. Put sellers, who are neutral to bullish on the stock, hope the share price stays above the exercise price.
Out-of-the-money options do not have intrinsic value. Their premium is made up of time value only. Out-of-the-money options generally have lower premiums than in-the-money and at-the-money options since they are more likely to expire worthless.
At-the-Money (ATM)
At-the-money puts and calls have strike prices that are the same as the market price of the underlying stock. These options, like out-of-the-money options, have no intrinsic value. At-the-money options are usually more expensive than out-of-the-money options, but less expensive than in-the-money options.
This type of option moneyness means that calls and puts are heavily influenced by volatility and time decay.
Near-the-Money
Near-the-money options have strike prices that are very close to the market price of the underlying stock, so they are just slightly in-the-money or out-of-the-money.
Near-the-money options are much more common than at-the-money options since the stock price is rarely precisely at a specific strike price. Near-the-money strikes are used when a trader wants exposure to an at-the-money option that is not available in the market.
Other Moneyness Terms
Other terms for moneyness include deep-in-the-money and far-out-of-the-money. These terms have no real qualitative difference between in-the-money and out-of-the-money, but are simply intensifiers. They are, however, in fairly common usage.
What Moneyness Means to Investors
Option moneyness tells a trader important information. The trader can use the moneyness of an option to help construct a trading thesis. For example, if you believe a stock price will drop substantially over a short time frame, you might consider purchasing an out-of-the-money put option since that option type and moneyness will appreciate greatly when the stock price drops in a big way.
Moneyness of options grows more crucial when you embark on more complex options strategies since multiple option legs have different moneyness — knowing the moneyness of the options strategy is critical to understanding your exposure.
Still, an option holder might exit an option by selling or covering in the market rather than exercising early so that they can capture the time value of an option in addition to any intrinsic value.
The Takeaway
Moneyness is used to describe where an option’s strike price is relative to the price of the underlying stock. It can help options traders gauge the amount of intrinsic value an option has and inform simple and complex options strategies.
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10 sneaky credit card scams & how to avoid them
As the use of credit cards continues to rise, so does the array of different credit card scams used to try to steal your money. Credit card criminals continue to design scams to entice you to hand over your credit card information, from phishing scams to credit card reader scams to threats of arrest.
To avoid falling victim, it helps to understand how credit card scams work and know what some of the most common scams are. And if you do end up becoming a victim of one, we’ll also walk you through how to report credit card scams.
Related: Avoiding student loan scams
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A credit card scam is when an unauthorized individual uses your credit or debit card to make fraudulent purchases or steal money from the account. While some credit card scams will take your credit card information right out from under you, others use strategies to entice you to hand over your information.
Given what a credit card is and how easy they are to use, it can be easy for a scammer to rack up debt under the cardholder’s name.
Becoming familiar with the top credit card scams can increase your awareness and help you better protect your identity from fraud. Here are some of the most common credit card scams to look out for.
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With an overcharge scam, you’ll receive an email, call, or text stating that a retailer or merchant overcharged your card. The scammer will request your personal information to complete a refund for the overcharge. They will then use this information to gain access to your credit card.
Usually, the scammer identifies a product or service that you already use, so it may not seem as suspicious when they request this information. But the fraudster may also use a more standard service that many people use, such as Netflix or Spotify, so that it won’t raise red flags. If you’re not a customer of the service or have never bought a specific product, that may give you more reason to want a refund.
While it’s always good to scrutinize your incoming calls, it’s especially important to do so when you receive a call from an unidentified number. If you answer, the caller may tell you that you must take immediate action to get a refund, or that it’s your last chance to do so. The urgency should be an immediate sign something is amiss.
If you receive a suspicious email, compare the email to past emails from the merchant or retailer. Scammers are often good at disguising a false email address, so look carefully for differences in the sender’s address. They may add “pay” or “support” to make the address look legitimate. You may also find misspellings and incorrect grammar in the email.
The best way to avoid this potential credit card scam is to either hang up the call or exit the email. You can then call your credit card company directly to see if this request was legitimate or a scam. You can find your creditor’s number on your credit card or credit card statement.
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One of the most common credit card scams that occurs over the phone is a fraudster calling to tell you that they can reduce your credit card interest rate and potentially save you significant money on interest payments. They will state that their company has a relationship with your credit card company; therefore, they can negotiate reduced interest payments.
However, to entice you to act now, they’ll say the offer is only available for a limited time. Then, the scammer will request your credit card information, such as your account number and CVV number on a credit card, for the alleged service.
Legitimate debt relief companies seldomly cold call consumers to get their business. Also, they cannot charge a fee upfront until they reduce your interest rate or settle a portion of your debt. Therefore, this call should set off alarm bells.
If you want to reduce your interest rate, contact your credit company directly. As the cardholder, you have a better chance of reducing your rate than a third-party company with no relationship with the creditor. If you do receive this call, simply ignore it like you would other credit card scams.
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Scammers can use credit card skimmers to lift your credit card information at gas stations. They do so by attaching an external device to the credit card machine at a pump. When you swipe your card, the device can save your information instantly.
So, before you swipe your card, check to see if the credit card reader you’re using at the pump looks the same as all the other ones. If it doesn’t, that can be a tipoff. You also can tug at the reader to see if it easily detaches.
Since skimmers are temporary, they’re usually only attached with double-sided tape, making them easy to remove. Don’t insert your card if you can remove the skimmer with little effort. Instead, go to another gas station to get your gas.
Make sure to inform authorities about the skimmers so they can handle it accordingly.
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Prepaid credit cards, also known as prepaid debit cards, allow you to load money onto them and make purchases. When prepaid credit card funds are depleted, you can no longer use them (unlike credit cards, there is no credit card limit for prepaid cards). You can usually purchase prepaid credit cards at retail stores or online.
Scammers use prepaid credit cards in many different ways to take your money. For example, a scammer may call and say you won the lottery. However, to get your winnings, you must pay the taxes. They may tell you that you can do so by loading a prepaid credit card with a certain amount of funds and sending the card number to the caller. After this is done, they promise to send you your winnings — but, in this case, the scammer may take the card money and never be seen again.
If someone is requesting a prepaid credit card, that’s a red flag. It’s best not to proceed with this transaction as it may be a prepaid credit card scam.
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This scam takes place in a hotel room, where the scammer will call up stating they are a hotel employee. They will inform you that there is an issue with your credit card, and you must verify your credit card information. Usually, these calls take place early in the morning or late at night so that you will be thrown off guard.
If this happens to you, it’s best to handle the matter in person. You can hang up and then visit the front desk to ensure your credit information isn’t exposed to the wrong person.
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The objective of this scam is to solicit you to give out your personal credit card information to pay off a debt, fine, penalty, or ticket. While arrest scams may seem unrealistic, the scammer relies on scare tactics to try to get the target to hand over their credit card information.
Usually, the scammer claims they are from a federal agency like the IRS, FBI, or other government agency that suggests there’s a connection to law enforcement. Then, they threaten that if this bill, fee, or ticket goes unpaid, you will be arrested, or other legal action will be taken immediately.
It’s doubtful that actual law enforcement or federal agencies would request sensitive information during a phone call, especially an abrupt one. Another sign that this is a scam is that the call may sound like a robot or like it’s pre-recorded. The caller may also use vague references that don’t coincide with the way legitimate law enforcement would communicate.
Even if you do owe outstanding fees, have a ticket, or were a part of some criminal activity recently, authorities or federal agencies wouldn’t request payment information over the phone in this manner. Therefore, don’t share any personal information with the caller. Just like with other scams, the best way to address your concerns is to hang up and call the agency directly to get any information straight from the source.
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When nonprofit organizations ask for donations, it may pull at your heartstrings. But scammers can use this strategy to swipe your credit card information right out from under you.
Scammers who use this strategy usually call you pretending to be a part of a nonprofit or other charitable organization. They will then request donations using everyday anecdotes or narratives designed to influence their targets. It’s also common for scammers to use this tactic when a natural disaster strikes or another current event requires aid.
Although it’s common for nonprofits to solicit donations over the phone, you should still feel uneasy when receiving one of these calls. If you want to give to the organization, jot down information from the caller, such as their phone number and financial information. Then, you can look up the phone number online to determine if it’s already identified as a scam. If it isn’t, you can visit the IRS’s Tax Exempt Organization Search and CharityNavigator.org to research the organization to determine its legitimacy.
Overall, it’s wise to avoid donating to unsolicited callers. Instead, consider visiting an organization’s actual website to determine the best way to donate.
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Whether you’re connecting to a public Wi-Fi hotspot via your phone or on your computer, scammers can try to access your credit card information when you sign on. In fact, they may prompt you to enter your credit card information to access a particular hotspot. Given how credit cards work, this is very risky.
So, when attempting to access the internet in public, look out if you’re asked to enter your credit card information. Instead, if you’re at a restaurant or retail location, ask an employee to share their hotspot information. This way, you’ll know you’re not exposing yourself to credit card fraud.
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Like gas pump skimmers, scammers can also use skimmers at ATMs to obtain credit card information.
The only way to identify a skimmer is by checking the scanning device. For example, if the card reader easily detaches, it’s likely a card skimmer. In addition, you can spot other things to identify a skimmer, such as graphics that don’t align or colors on the machine that don’t match the reader. Another clue is if the keypad seems cheap or too thick.
Before entering your card into a reader, investigate for a skimmer. Familiar places skimmers hide are usually in high-traffic areas or tourist locations. Don’t use your credit card if you’re unsure whether a skimmer is present or have a feeling something may be off, potentially indicating a credit card reader scam.
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Like the name suggests, a phishing scam involves fraudsters phishing for your personal information. Scammers contact their targets through the phone or over email, posing as an honest company. They then provide fraudulent links or instructions to help them access your personal credit card information.
For example, the scammer may impersonate your credit card company and state that your account details must be updated due to a compromised card. They will request your card information or answers to security questions over the phone or email to resolve this issue. Additionally, the scammer may request the answers to your security questions for protection purposes.
Don’t provide any of this information. Even if they suggest this is a sensitive matter and must be addressed immediately, it’s best to hang up and call your credit card company right away.
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To keep your credit card information safe, here are some steps you can take:
- Select a credit card with 0% liability on unauthorized purchases. The Fair Credit Billing Act (FCBA) limits your financial responsibility for credit card fraud to up to $50. In other words, you will only have to pay $50 if you’re a victim of one of these credit card scams and request a credit card chargeback. However, some credit card companies offer 0% liability as a perk, which means you aren’t responsible for any fraud.
- Keep tabs on your credit card activity. Regularly looking at your credit card activity and checking your credit card balance can help you spot any suspicious activity. If you do notice anything, contact your credit card company right away.
- Request transaction alerts. Usually, credit card companies let you sign up for transaction alerts, such as for balance transfers, large purchases, and international purchases. Using alerts is a great way to monitor your card activity.
- Ensure your information is secure. When making purchases online, over the phone, or in person, ensure your information is secure. For example, only use sites with “https” in the URL when shopping online. Also, avoid using public Wi-Fi where your personal information may be in jeopardy.
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The first action item if you’re a victim of a credit card scam is to contact your credit card company to let them know about the fraud. Per the Fair Credit Billing Act, you have 60 days after receiving your billing statement to report any fraudulent activity on your card. After informing your creditor of the incident, make sure to change your password for your account.
You may also want to contact the three major credit bureaus: Equifax, Experian, and TransUnion. Request verification of your identity and ask for a fraud alert to get linked to your report.
Additionally, if you’re a credit card scam victim, you can contact the Federal Trade Commission (FTC) to report the crime. You can report your incident online or over the phone at 1-877-382-4357.
If you’ve discovered a fraudulent website, email or another internet scam, report it to the Internet Crime Complaint Center (IC3). Unfortunately, not all scams originate in the U.S.; if you’re a victim of an international scam, report it through econsumer.gov.
All reports help consumer protection agencies pinpoint trends and prevent other consumers from falling victim to credit card scams.
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Who is liable for a credit card scam?
Under the Fair Credit Billing Act (FCBA), you’re only liable for up to $50 of credit card fraud. However, if your credit card has 0% fraud liability protection, you may not be liable for any fraudulent charges.
What counts as credit card fraud?
When an unauthorized person makes a charge with your credit card or steals your credit card information, this is considered credit card fraud.
How do I report credit card fraud?
Go to the Federal Trade Commission’s website to report the incident. Law enforcement agencies will then use these reports to investigate criminal activity to prevent future fraud. Once you submit a report, you can follow up with local law enforcement, if your creditors suggest it’s wise to do so.
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If you’re not careful, it’s easy to become a victim of credit card scams. But, if you monitor your account, set off fraud alerts, and keep your information close to your chest, you’ll have a better chance of avoiding getting duped.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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