Moneyness is a vital term in options trading that helps option traders understand the relationship between the price of an underlying asset, like a stock, and the strike price of an option. It characterizes an option’s financial worth or the potential to make money if it were exercised today. There are three possible states of Moneyness – In the Money (ITM), Out of the Money (OTM) and At the Money (ATM).

If an option is considered In the Money (ITM), it means the option would be profitable if it were to be exercised immediately. On the contrary, an Out of the Money (OTM) option suggests that exercising the option immediately would not yield any profit. An option is considered At the Money (ATM) when the price of the underlying asset equals the strike price of the option.

However, it’s important to note that Moneyness does not guarantee profit at the time of the option’s expiry, as this will depend on the asset’s price at that time. It is a key concept for traders regarding the option’s current benefit and future potential.