Near the Money
Candlefocus EditorAn NTM option can be either in-the-money (ITM) or out-the-money (OTM). An ITM option gives the holder the right to purchase an underlying asset at a fixed price, which in effect, is lower than its current market price. An OTM option on the other hand gives the holder the right to sell an underlying asset at a fixed price, which in effect, is higher than its current market price. By targeting NTM options instead of ATM options, investors are able to profit from potential price volatility in the underlying asset.
Investors use NTM options to speculate on the direction of the underlying asset price and to hedge against losses in a portfolio of stocks. Because the strike price of an NTM option is neither too far away nor too close to the current price of the underlying asset, NTM options offer a greater upside potential than ATM options, but also a greater risk. If the underlying asset price moves significantly lower than predicted by the investor, the NTM option will expire worthless.
In conclusion, NTM options offer investors a powerful way to capitalize on potential price movements in the underlying asset. They provide a higher potential for profit than ATM options, but come with added risk. NTM options should be used with caution, since they are dependent on the market’s demand to provide returns. Knowing the state of moneyness, along with the underlying asset’s volatility, can help investors decide when to enter or exit a position.