In the Money vs Out of the Money: Understanding Option Moneyness
Learn the difference between ITM, ATM, and OTM options. Understand intrinsic value, time value, and how to choose the right strike price for your strategy.
What Is Option Moneyness?
Moneyness describes the relationship between an option's strike price and the current stock price.
There are three categories:
| Term | Abbreviation | Meaning |
|---|---|---|
| In the Money | ITM | Option has intrinsic value |
| At the Money | ATM | Strike equals (or very close to) stock price |
| Out of the Money | OTM | Option has no intrinsic value |
Moneyness for Calls vs. Puts
This is where it gets important—calls and puts have opposite definitions:
Call Options
| Stock Price vs Strike | Moneyness |
|---|---|
| Stock above strike | In the Money (ITM) |
| Stock equals strike | At the Money (ATM) |
| Stock below strike | Out of the Money (OTM) |
Example: Stock at $105, Strike at $100
- This call is ITM by $5
Put Options
| Stock Price vs Strike | Moneyness |
|---|---|
| Stock below strike | In the Money (ITM) |
| Stock equals strike | At the Money (ATM) |
| Stock above strike | Out of the Money (OTM) |
Example: Stock at $95, Strike at $100
- This put is ITM by $5
Memory trick: ITM means the option would have value if exercised right now.
Intrinsic Value vs. Time Value
Every option's price has two components:
Option Price = Intrinsic Value + Time Value
Intrinsic Value
The "real" value—what you'd get if you exercised immediately.
| Option Type | Intrinsic Value Formula |
|---|---|
| Call | Max(Stock Price − Strike, 0) |
| Put | Max(Strike − Stock Price, 0) |
Example: Stock at $105
| Option | Strike | Intrinsic Value |
|---|---|---|
| Call | $100 | $5 (ITM) |
| Call | $110 | $0 (OTM) |
| Put | $100 | $0 (OTM) |
| Put | $110 | $5 (ITM) |
Time Value
The extra premium beyond intrinsic value, representing the chance of further favorable movement.
Time Value = Option Price − Intrinsic Value
| Moneyness | Intrinsic Value | Time Value |
|---|---|---|
| ITM | Yes | Some |
| ATM | No | Maximum |
| OTM | No | All of the premium |
ATM options have the most time value. This is where uncertainty is highest.
How Moneyness Affects Option Price
Example: Stock trading at $100
| Strike | Call Price | Intrinsic | Time Value | Moneyness |
|---|---|---|---|---|
| $90 | $12.00 | $10.00 | $2.00 | Deep ITM |
| $95 | $7.50 | $5.00 | $2.50 | ITM |
| $100 | $4.00 | $0.00 | $4.00 | ATM |
| $105 | $2.00 | $0.00 | $2.00 | OTM |
| $110 | $0.75 | $0.00 | $0.75 | Deep OTM |
Moneyness and Delta
Delta correlates directly with moneyness:
| Moneyness | Call Delta | Put Delta |
|---|---|---|
| Deep ITM | ~0.90 to 1.00 | ~−0.90 to −1.00 |
| ITM | ~0.60 to 0.90 | ~−0.60 to −0.90 |
| ATM | ~0.50 | ~−0.50 |
| OTM | ~0.10 to 0.40 | ~−0.10 to −0.40 |
| Deep OTM | ~0.00 to 0.10 | ~−0.00 to −0.10 |
Delta measures price sensitivity. Its magnitude is sometimes used as a rough shortcut for the chance of expiring ITM, but it is not probability of profit. A $100 call bought for $4 is ITM at $102 and still loses $2 per share at expiration. Profit requires a price above $104 before fees.
Which Moneyness Should You Choose?
ITM Options
| Pros | Cons |
|---|---|
| More intrinsic value and stock-like exposure | More expensive |
| Higher delta (more stock-like) | Less leverage |
| More intrinsic value protected | Still has time decay |
Best for: Conservative directional bets, stock replacement strategies
ATM Options
| Pros | Cons |
|---|---|
| Large time-value exposure | ATM is not a 50% probability-of-profit guarantee |
| Good balance of cost and delta | Highest theta decay |
| Most liquid | Sensitive to IV changes |
Best for: Balanced risk/reward, directional bets with moderate confidence
OTM Options
| Pros | Cons |
|---|---|
| Lower premium than an otherwise comparable ITM option | Needs a move beyond the strike and premium to profit at expiration |
| Biggest % gains if right | Likely to expire worthless |
| Defined, small loss | Need large move to profit |
Best for: High-conviction directional bets, lottery tickets, hedging
Moneyness by Strategy
| Strategy | Typical Moneyness | Why |
|---|---|---|
| Buying calls/puts | ATM or slightly OTM | Balance of cost and probability |
| Selling covered calls | OTM | Keep stock, collect premium |
| Vertical spreads | Mix of ATM and OTM | Define risk/reward |
| Iron condors | OTM on both sides | High probability of staying OTM |
| LEAPS (long-term) | ITM or ATM | More stock-like behavior |
What Happens at Expiration
| Moneyness at Expiration | Outcome |
|---|---|
| ITM | Auto-exercised (unless you close first) |
| ATM | Usually expires worthless |
| OTM | Expires worthless (100% loss) |
Most brokers auto-exercise ITM options by $0.01 or more at expiration.
Key Takeaways
- ITM = has intrinsic value (call: stock > strike, put: stock < strike)
- ATM = strike equals stock price (maximum time value)
- OTM = no intrinsic value (all time value, higher risk)
- Compare intrinsic value, premium, and expiration breakeven when choosing a strike
- Delta approximates probability of expiring ITM
Frequently Asked Questions
What does in the money mean for options?
An option is "in the money" (ITM) when it has intrinsic value. For calls, this means the stock price is above the strike price. For puts, it means the stock price is below the strike price. ITM options have real value if exercised immediately.
Should I buy in the money or out of the money options?
It depends on your goal. OTM options are cheaper and offer more leverage but have higher risk of expiring worthless. ITM options generally have greater intrinsic value and behave more like the underlying stock. Moneyness alone does not establish probability of profit: the premium, expiration, and future price distribution also matter.
What happens to out of the money options at expiration?
Out of the money options expire worthless. If you bought an OTM option, you lose 100% of the premium paid. OTM options have no intrinsic value and will not be exercised.
Why do out of the money options have value before expiration?
OTM options have time value because there's still a chance the stock could move enough to make them profitable before expiration. This time value decays as expiration approaches, reaching zero at expiration.
Visualize Moneyness in Action
Build a strategy and see how different strike prices affect your risk/reward profile. OptionsCalc shows ITM, ATM, and OTM options at a glance.
Options trading involves significant risk and is not appropriate for all investors. Out of the money options frequently expire worthless. Consider your investment objectives and risk tolerance before trading options.
Sources and calculation assumptions
OIC: delta provides background on the mechanics discussed here. Numerical examples on this page are hypothetical, generally use standard 100-share contracts, and exclude fees unless stated. Before-expiration values and probabilities depend on a model; they are not guaranteed returns.
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