What Is In the Money, At the Money & Out of the Money?

Options are financial contracts that provide the buyer with the right, but not the obligation, to buy or sell an underlying asset at a predetermined price by a specified date. Understanding the concept of “moneyness” is fundamental to comprehending how options derive and hold their value.

Moneyness describes the relationship between an option’s strike price and the current market price of its underlying asset. This characteristic is dynamic, constantly changing as the underlying asset’s price fluctuates in the market.

Understanding Moneyness Concepts

The term “moneyness” categorizes options into three states: In the Money (ITM), At the Money (ATM), and Out of the Money (OTM). These classifications indicate whether an option has immediate intrinsic value or relies on future price movements.

An option is considered “In the Money” (ITM) when it possesses intrinsic value, meaning it would be profitable to exercise the option at the current market price. ITM options reflect a theoretical profit if exercised instantly.

Conversely, an option is “Out of the Money” (OTM) when it has no intrinsic value. Exercising an OTM option immediately would result in a financial loss, as the strike price is not favorable compared to the current market price. OTM options rely entirely on the underlying asset’s price moving in a favorable direction before expiration to gain value.

“At the Money” (ATM) refers to an option where the strike price is equal or very close to the current market price of the underlying asset.

Moneyness for Call Options

A call option grants the holder the right, but not the obligation, to buy an underlying asset at a specified strike price before or on the expiration date. For a call option, moneyness is determined by comparing the strike price to the current market price of the underlying asset.

In the Money (ITM) Call Options

A call option is “In the Money” (ITM) when the underlying asset’s current market price is higher than the call option’s strike price. For instance, if an investor holds a call option with a strike price of $50 on a stock currently trading at $55, the option is ITM. This is because the investor could buy the stock for $50 using the option and immediately sell it in the market for $55, realizing a $5 per share gain before accounting for the option’s cost.
Consider a scenario where a stock is trading at $100. A call option with a strike price of $95 would be ITM, as the right to buy at $95 is valuable when the market price is higher. The lower the strike price relative to the current market price, the deeper ITM the call option is.

At the Money (ATM) Call Options

A call option is “At the Money” (ATM) when the underlying asset’s current market price is exactly equal to or very close to the call option’s strike price. For example, if a stock is trading at $100, a call option with a $100 strike price would be considered ATM. In this situation, exercising the option would neither yield an immediate profit nor a loss based solely on the price difference.

Out of the Money (OTM) Call Options

A call option is “Out of the Money” (OTM) when the underlying asset’s current market price is lower than the call option’s strike price. If a stock is trading at $100, a call option with a strike price of $105 would be OTM. Buying the stock at $105 using the option and immediately selling it at the market price of $100 would result in a loss, making immediate exercise unprofitable. OTM call options hold no intrinsic value and will expire worthless if the underlying stock price does not rise above the strike price by expiration.

Moneyness for Put Options

A put option grants the holder the right, but not the obligation, to sell an underlying asset at a specified strike price before or on the expiration date. For a put option, moneyness is determined by comparing the strike price to the current market price of the underlying asset.

In the Money (ITM) Put Options

A put option is “In the Money” (ITM) when the underlying asset’s current market price is lower than the put option’s strike price. For instance, if an investor holds a put option with a strike price of $50 on a stock currently trading at $45, the option is ITM. This is because the investor could buy the stock for $45 in the market and immediately sell it for $50 using the option, realizing a $5 per share gain before considering the option’s cost.
Consider a scenario where a stock is trading at $100. A put option with a strike price of $105 would be ITM, as the right to sell at $105 is valuable when the market price is lower. The higher the strike price relative to the current market price, the deeper ITM the put option is.

At the Money (ATM) Put Options

A put option is “At the Money” (ATM) when the underlying asset’s current market price is exactly equal to or very close to the put option’s strike price. For example, if a stock is trading at $100, a put option with a $100 strike price would be considered ATM. Exercising this option would not yield an immediate profit or loss based solely on the price difference.

Out of the Money (OTM) Put Options

A put option is “Out of the Money” (OTM) when the underlying asset’s current market price is higher than the put option’s strike price. If a stock is trading at $100, a put option with a strike price of $95 would be OTM. Selling the stock at $95 using the option and immediately buying it back at the market price of $100 would result in a loss, making immediate exercise unprofitable. OTM put options hold no intrinsic value and will expire worthless if the underlying stock price does not fall below the strike price by expiration.

Moneyness and Option Value Components

The total price of an option, known as its premium, is composed of two primary elements: intrinsic value and extrinsic value. Moneyness directly influences an option’s intrinsic value and its overall premium. Understanding these components is essential for evaluating an option’s true worth beyond its classification.

Intrinsic value represents the immediate profit an option holder would realize if the option were exercised right away. Only “In the Money” (ITM) options possess intrinsic value, while At the Money (ATM) and Out of the Money (OTM) options have zero intrinsic value. For a call option, intrinsic value is calculated as the underlying asset’s current market price minus the strike price. For a put option, it is the strike price minus the underlying asset’s current market price. For instance, a call option with a $50 strike on a stock trading at $55 has an intrinsic value of $5 ($55 – $50). A put option with a $50 strike on a stock trading at $45 also has an intrinsic value of $5 ($50 – $45).

Extrinsic value, also known as time value, is the portion of an option’s premium that exceeds its intrinsic value. This value reflects factors such as the time remaining until expiration and the volatility of the underlying asset. All options, whether ITM, ATM, or OTM, typically have some amount of extrinsic value until expiration. As an option approaches its expiration date, its extrinsic value generally decreases, a phenomenon known as time decay.

ATM and OTM options consist entirely of extrinsic value, as they have no intrinsic value. ITM options, conversely, have both intrinsic and extrinsic value. The extrinsic value component represents the market’s expectation that the option’s value could increase further before expiration due to favorable price movements or continued volatility.