Posted in Finance, Accounting and Economics Terms, Total Reads: 253
Definition: Near The Money
Near the money is a concept which happens in the case of an options contract, when the strike price is close or equal to the current market price of the option. On the other hand, at the money when the strike price is equal to market price.
Since the prices are close, it becomes more expensive to purchase for the investor.
Suppose you call on options contract of Nifty trading currently at 8450 with a strike price of 8500 for an expiry next month. You pay some commission for the contract to NSE of say 120 Rs. This commission that you pay is non refundable. You may sell the same contract at different premium price. Now, when the Nifty would be trading at 8499.5 or 8500.5 or 8500, it is said to be Near the money as it has touched the strike price. You do not make a profit here as you have paid commission which is not recovered by selling at strike price. Thus when the Nifty goes above 8620 (8500+120), before the expiry date you start making a profit.
• You trade on the strike price in this case and save from loss on change in value of underlying asset
• You are actually making a loss as the premium paid is not recovered in case of near the money.