Moneyness Ratio
A dimensionless metric that standardises the position of a strike price relative to the current underlying price, calculated as the ratio of strike to spot (or spot to strike), enabling comparison of option positioning across underlyings with different absolute price levels.
When comparing options across different underlying securities — say, a Nifty option at a strike of 22,500 versus a Reliance Industries option at a strike of Rs 2,800 — the absolute distance between strike and spot is not directly comparable because the underlying prices are on entirely different scales. The moneyness ratio resolved this by expressing the relative position as a dimensionless ratio.
The most common formulation was the strike-to-spot ratio (K/S), where K was the strike price and S was the current spot price of the underlying. An ATM option had a K/S ratio of exactly 1.0. A call option with K/S of 1.05 was 5 percent out of the money; a put with K/S of 0.95 was also 5 percent out of the money. This normalisation allowed analysts to compare implied volatility across underlyings (the volatility skew) on a comparable basis.
An alternative formulation expressed moneyness in standard deviation units: log(K/S) divided by the implied volatility multiplied by the square root of time to expiry. This delta-normalised moneyness measure was particularly useful in advanced volatility surface modelling, as it removed the dependence on time to expiry and volatility level, producing a strike parameterisation where the volatility surface was more stable over time.
For practical traders in India's F&O markets, the simpler K/S ratio was the norm. Option chain analysis on NSE's website implicitly used moneyness ratios when presenting strikes as percentages above or below the spot price. A trader looking for a 2 percent OTM call on any index stock would scan for strikes where K/S was approximately 1.02.
The moneyness ratio was also used in systemic studies of F&O activity. SEBI and NSE's market research occasionally analysed the distribution of open interest across different moneyness buckets to understand how the market was positioned ahead of events such as budget announcements or central bank decisions.