3 Examples of How Moneyness Impacts Options Trading

An options' strike -- and where others are placing theirs -- is important for returns

Managing Editor
Sep 1, 2023 at 2:39 PM
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Subscribers to Chart of the Week received this commentary on Sunday, August 27.

Last week, COO and fearless leader Katie Schaeffer was chatting with me about our latest product, In-the-Money Countdown. She mentioned the term ‘moneyness’ as one of the defining aspects of the product. I – in my liberal arts, failed-microeconomics-in-my-first-try ignorance – thought she had made a typo. I’m ashamed to admit that I had no clue what the term ‘moneyness’ meant. But I’m probably not alone; there are knowledge gaps galore among the options trading crowd. But in the name of humbling transparency, this knowledge gap is an opportunity to educate not only myself, but the masses, on an important options trading concept.

Moneyness, per the official CME Group website, is a term used to describe whether an options contract is ‘in-the-money’ (ITM), out-of-the-money’ (OTM), or ‘at-the-money’ (ATM). Moneyness is when an option is ITM, so exercising that option would result in a profit. For calls, this is of course when the strike price is less than the current market price, and vice versa for puts, when the strike price is greater than the current market price. If you’re an options trader, then, you knew what moneyness was without even knowing the specific term. And if you’re not, the graphic below from Project Finance should help articulate the concept.

Moneyness is critical in evaluating your risk and identifying an options contract’s value. Let’s look at three examples of successful trades from our Schaeffer’s team and examine how moneyness was involved.

Project Finance COTW

Last week, a Cboe Global Markets Inc (BATS:CBOE) September 15, 140-strike call achieved a 102% target profit. Per Senior Market Strategist Matthew Timpane, “buying near the peak call open interest (OI) level that was about to fall off allowed us to capitalize on upward price momentum giving the stock freedom of movement after expiration.” The 140-strike peak call OI level fell off in July options expiration (OPEX), giving potential for a move higher, while the 135-strike peak put OI remains after July OPEX and could continue to act as support on any weakness. CBOE was closed last Wednesday at $152.

A similar example was found in Expiration Week Countdown Bulletin, with a Netflix Inc (NASDAQ:NFLX), August 18, 430-strike put that saw a 215% target achieved. The trader selected a strike where recent support was broken to trade against, that would allow subscribers to reach the target before nearing the round $400 level. A large put OI level could act as a magnet, before acting as a springboard. Sure enough, NFLX broke below the $430 level, which had been acting as support. A push below the 415-strike OI level also made the 400-strike a heavy magnet. On Aug. 18, when this trade was closed, Netflix stock was trading as low as $398.15, breaching that all-important ‘magnet’.

There are other examples of moneyness’ role even in OTM options, that help identify bargains and cost-effective trades. Per Senior Equity Analyst Joe Hargett, an ImmunoGen Inc (NASDAQ:IMGN), August 18, 17-strike put secured an overall profit of 272% in the Event Trader service. The $17 strike was a momentum play. Per Joe, “an OTM option helped take advantage of the directionality of the trade. In terms of “money-ness,” it made more sense to trade out of the money in the direction the stock was trending in order to capture all of the move. In other words, while trading an ITM option would have provided a bit of a cushion in the event of a reversal in the stock, that extra cost to entry would have limited the overall return on the trade.” He added, “since I had what I felt was confirmation of direction already, the extra safety net that an ITM option would have provided felt less necessary that it would have if I had traded the option ahead of earnings or without directional confirmation.

With this knowledge gap now filled, hopefully options traders can use moneyness to identify vantage points when selecting stocks, strikes, and time. Check out the link below to subscribe for our In-the-Money Countdown, which is currently running a one-month sale!

In-the-Money Countdown Trial


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