CFA Option Strategy Moneyness: Classify the Legs Before the Strategy

Moneyness questions become slippery when candidates try to label the whole strategy first. A straddle, strangle, collar, or spread is not itself in the money or out of the money. The individual option legs have moneyness, and the strategy has a payoff shape.

The exam-safe process is simple: identify the current underlying price, list each option's strike, classify each leg, and only then attach the strategy name.

Start With the Two Moneyness Rules

For a call option:

• In the money: S > K
• At the money: S = K or very close
• Out of the money: S < K

For a put option:

• In the money: S < K
• At the money: S = K or very close
• Out of the money: S > K

Those rules are the anchor. Strategy names help with payoff intuition, but they do not replace leg-by-leg classification.

Why Strategy Names Can Mislead

Suppose Orchid Freight stock trades at 50.

Straddle

A long straddle buys a call and a put with the same strike and expiration. If both options have strike 50, both legs are at the money at initiation.

But if a vignette says the straddle uses strike 55, the call is out of the money and the put is in the money when the stock is at 50. It is still a same-strike call-plus-put package, but it is not an at-the-money straddle.

Strangle

A long strangle buys a lower-strike put and a higher-strike call. If the stock is 50, a common structure might buy a 45 put and a 55 call. Both options are out of the money at initiation:

• 45 put: out of the money because S > K
• 55 call: out of the money because S < K

That is why a strangle is usually cheaper than an otherwise similar straddle, but it also needs a larger move before either leg produces intrinsic value.

Spread

A spread uses options of the same type with different strikes. The name tells you the directional exposure, not the moneyness of every leg.

For example, if Mariner Biotech trades at 60, a bull call spread might buy a 55 call and sell a 65 call:

• Long 55 call: in the money because 60 > 55
• Short 65 call: out of the money because 60 < 65

If the same spread used strikes 60 and 70, the long lower-strike call would be at the money and the short higher-strike call would be out of the money. The bull call spread label stays the same, but the leg moneyness changes.

A Three-Step Exam Process

Step 1: Mark S

Write down the current underlying price. Do not start with the strategy label.

Step 2: Classify each option leg

For every call and put, compare S with that leg's strike. Keep long and short separate from moneyness. A short out-of-the-money call is still an out-of-the-money call; the short position just means the investor wrote it.

Step 3: Use the strategy name for payoff behavior

Once the legs are classified, the strategy name explains why the investor uses the structure:

• Straddle: large move in either direction from the shared strike
• Strangle: large move beyond separated strikes
• Bull call spread: limited-upside bullish exposure
• Bear put spread: limited-downside bearish exposure
• Collar: stock position with downside floor and upside cap

Worked Example: Mixed Moneyness in One Strategy

Canyon Solar stock trades at 42. An analyst evaluates three one-month strategies:

1. Buy a 42 call and a 42 put.
2. Buy a 38 put and a 46 call.
3. Buy a 40 call and sell a 48 call.

The classification is:

The key is that the strategy names are not doing the classification. The stock price and strike prices are.

Common Traps

Trap 1: Treating long and short as moneyness

Long or short tells you ownership direction. It does not tell you whether the option is in the money. A written call with strike 70 is still out of the money if the stock is 64.

Trap 2: Assuming every straddle is at the money

Many textbook examples use an at-the-money straddle because it is clean, but the exam can specify a strike away from the current stock price. Read the numbers.

Trap 3: Assuming every spread has one ITM leg and one OTM leg

That can happen, but it is not guaranteed. If both call strikes are above the stock price, both calls are out of the money even if the position is still a bull call spread.

Trap 4: Confusing intrinsic value with profit

Moneyness only tells you whether the option has intrinsic value. Profit also depends on the premium paid or received and the total strategy cost.

Exam Framing

CFA questions may ask for moneyness directly, or they may bury it inside a strategy payoff problem. The safest move is to ignore the strategy label for ten seconds and classify each leg mechanically.

Only after that should you discuss breakevens, maximum gain, maximum loss, or volatility exposure. That order prevents the most common mistake: memorizing a strategy diagram without noticing that the vignette changed the strikes.