In/At/Out of the Money
How the relationship between stock price and strike price determines moneyness.
Moneyness describes the relationship between an option's strike price and the current price of the underlying stock. An option is either in the money (ITM), at the money (ATM), or out of the money (OTM). This classification tells you whether the option has intrinsic value right now.
Why It Matters
Moneyness determines an option's intrinsic value, its delta, how much premium you pay, and the probability that it expires profitable. It is the first filter you apply when selecting a strike price.
ITM options cost more but have a higher probability of expiring with value. OTM options are cheaper but more speculative — the stock needs to move in your direction just to break even. ATM options sit at the balance point between cost and probability, which is why they are the most heavily traded.
How It Works
For call options:
- In the money (ITM): Stock price is above the strike price. The option has intrinsic value.
- At the money (ATM): Stock price equals (or is very close to) the strike price.
- Out of the money (OTM): Stock price is below the strike price. No intrinsic value.
For put options (it's the reverse):
- In the money (ITM): Stock price is below the strike price.
- At the money (ATM): Stock price equals the strike price.
- Out of the money (OTM): Stock price is above the strike price.
The degree of moneyness matters too. An option that is $0.50 ITM behaves very differently from one that is $15 ITM. Deep ITM options have deltas near 1.0 (or -1.0 for puts) and move almost dollar-for-dollar with the stock. Deep OTM options have very small deltas and barely move until the stock gets closer to the strike.
ATM options have a delta of roughly 0.50, which also means they have approximately a 50% chance of expiring in the money. This is not a coincidence — delta is frequently used as a rough proxy for the probability of an option finishing ITM.
Quick Example
Stock GHI trades at $50.
| Strike | Call Moneyness | Put Moneyness |
|---|---|---|
| $45 | ITM ($5 intrinsic) | OTM (no intrinsic) |
| $50 | ATM | ATM |
| $55 | OTM (no intrinsic) | ITM ($5 intrinsic) |
If you buy the $45 call, you are paying for $5 of intrinsic value plus some extrinsic value. If you buy the $55 call, you are paying only for extrinsic value — a bet that the stock moves above $55.