When diving into the world of options trading, one of the most essential foundational concepts you’ll encounter is option moneyness. This term helps traders quickly assess the relationship between an option’s strike price and the current market price of the underlying asset. By classifying options as In the Money (ITM), At the Money (ATM), or Out of the Money (OTM), traders can better evaluate potential profitability, risk, and strategy design.
Understanding moneyness isn't just about memorizing definitions—it's about making smarter, faster decisions when building complex trades. Whether you're constructing spreads, hedges, or speculative positions, knowing where your options stand in terms of moneyness gives you a clear edge.
Let’s break down each category with clarity and precision.
What Is Option Moneyness?
Option moneyness refers to the relative position of the underlying asset’s current price compared to the option’s strike price. It determines whether an option has intrinsic value and how close it is to being profitable at expiration.
There are three primary classifications:
- In the Money (ITM)
- At the Money (ATM)
- Out of the Money (OTM)
These terms apply differently to calls and puts due to their opposing payoff structures.
In the Money (ITM) Options
An In the Money option has intrinsic value because exercising it would result in an immediate profit.
For Call Options:
A call is ITM when the underlying stock price is above the strike price.
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For example:
- Strike Price: $40
- Current Stock Price: $50
→ This call option is $10 ITM.
The holder can buy the stock at $40 and immediately sell it at the market price of $50, realizing a $10 gain per share (before premiums and fees).
For Put Options:
A put is ITM when the underlying stock price is below the strike price.
Example:
- Strike Price: $40
- Current Stock Price: $30
→ This put is $10 ITM.
The holder can sell the stock at $40 and repurchase it at $30, locking in a $10 profit.
ITM options are typically more expensive because they carry both intrinsic value and time value.
At the Money (ATM) Options
An At the Money option has a strike price that is equal to or very close to the current market price of the underlying asset.
For example:
- Stock Price: $40
- Call or Put Strike Price: $40
→ The option is ATM.
ATM options have no intrinsic value, only extrinsic (time) value. They are highly sensitive to changes in volatility and time decay, making them popular choices for strategies like straddles and strangles.
Because ATM options sit right on the edge between profit and loss, small moves in the underlying can push them into ITM or OTM territory—offering high leverage for directional bets.
Out of the Money (OTM) Options
An Out of the Money option has no intrinsic value; if exercised today, it would not be profitable.
For Call Options:
A call is OTM when the stock price is below the strike price.
Example:
- Strike Price: $50
- Stock Price: $45
→ The call is $5 OTM.
It only becomes valuable if the stock rises above $50 before expiration.
For Put Options:
A put is OTM when the stock price is above the strike price.
Example:
- Strike Price: $35
- Stock Price: $45
→ The put is $10 OTM.
It only gains value if the stock drops below $35.
OTM options are cheaper than ITM or ATM options, making them attractive for speculative plays or income strategies like credit spreads.
Visualizing Moneyness in Strategy Context
Moneyness becomes even more critical when analyzing multi-leg strategies such as spreads, iron condors, or butterflies. In these cases, you must evaluate moneyness based on the overall strategy’s breakeven points and profit zone, not just individual legs.
For instance, consider a bear call spread where:
- You sell a $45 call
- Buy a $50 call
If the break-even point is around $47 and maximum profit occurs below $45, then:
- Prices near $47 → ATM range for the strategy
- Below $45 → In profit (effectively "in the money" for this spread)
- Above $47 → Out of profit ("out of the money")
This broader interpretation shows that moneyness isn’t always tied to a single strike—it depends on your strategy’s payoff structure.
Intrinsic vs. Extrinsic Value: The Building Blocks
Every option premium consists of two components:
1. Intrinsic Value
The difference between the market price and strike price when favorable.
- Present only in ITM options.
- Zero for ATM and OTM options.
2. Extrinsic (Time) Value
Also known as time value or volatility premium.
- Reflects time until expiration and expected volatility.
- Highest for ATM options.
- Erodes as expiration approaches (time decay).
An option’s total price = Intrinsic Value + Extrinsic Value
Knowing this breakdown helps you assess whether you're overpaying for time value or capturing real intrinsic worth.
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Frequently Asked Questions (FAQ)
Q: Can an option be both ITM and lose money?
Yes. An option can be ITM at expiration but still result in a net loss if the premium paid exceeds the intrinsic value. For example, paying $6 for a call with $5 of intrinsic value results in a $1 loss per share.
Q: Why are ATM options more volatile in price?
ATM options have the highest sensitivity to changes in implied volatility and time decay because they contain pure time value and are most likely to transition between ITM and OTM states.
Q: Do OTM options always expire worthless?
Not always. While many OTM options do expire worthless, a significant move in the underlying asset before expiration can turn an OTM option into an ITM one, creating substantial returns—especially for buyers.
👉 See how advanced tools help track moneyness shifts in live markets.
Q: How does moneyness affect options pricing models?
Models like Black-Scholes use moneyness as a core input. The closer an option is to ATM, the higher its gamma and vega exposure; deeper ITM or OTM options exhibit higher delta or theta characteristics respectively.
Q: Is there a quick way to identify moneyness while trading?
Yes. Most trading platforms highlight ITM/ATM/OTM status directly on options chains. Look for color coding or labels next to strike prices—often red for OTM, green for ITM, and neutral for ATM.
Final Thoughts
Mastering ITM, ATM, and OTM classifications is crucial for any trader stepping into options. These labels do more than describe current pricing—they inform strategy selection, risk assessment, and trade timing.
Whether you're buying calls for leverage, selling puts for income, or building complex spreads, understanding moneyness allows you to navigate options chains with confidence.
As you continue refining your skills, always remember: moneyness isn’t static. It evolves with every tick in the market. Staying aware of where your options stand—relative to price and time—can make all the difference between profit and loss.
👉 Start applying moneyness concepts with real-time tools today.