In, At & Out of the Money
Moneyness in plain terms — where the strike sits relative to price, and why it matters.
“Moneyness” describes where an optionThe right, not the obligation, to buy or sell at a set price.’s *strikeThe fixed price at which an option can be exercised. sits relative to the current price* of the underlying — and it tells you, right now, whether the optionThe right, not the obligation, to buy or sell at a set price. has real value if exercised. Three terms cover it: in-the-money (ITMWhere an option’s strike sits relative to the current price.), at-the-money (ATMWhere an option’s strike sits relative to the current price.), and out-of-the-money (OTMAn option with no intrinsic value yet.).
- In-the-money (ITMWhere an option’s strike sits relative to the current price.) — exercising would be profitable now. A callThe right, not the obligation, to buy or sell at a set price. is ITMWhere an option’s strike sits relative to the current price. when price is above the strikeThe fixed price at which an option can be exercised.; a putThe right, not the obligation, to buy or sell at a set price. is ITMAn option with intrinsic value if exercised now. when price is below the strikeThe fixed price at which an option can be exercised..
- At-the-money (ATMWhere an option’s strike sits relative to the current price.) — the strikeThe fixed price at which an option can be exercised. is roughly equal to the current price.
- Out-of-the-money (OTMWhere an option’s strike sits relative to the current price.) — exercising would be pointless now. A callThe right, not the obligation, to buy or sell at a set price. is OTMWhere an option’s strike sits relative to the current price. when price is below the strikeThe fixed price at which an option can be exercised.; a putThe right, not the obligation, to buy or sell at a set price. is OTMAn option with no intrinsic value yet. when price is above it.
Should beginners buy ITM or OTM options?
OTM options are cheap and tempting but mostly expire worthless (they’re lottery tickets); ITM options cost more but have real value and behave more predictably (more like the stock). Beginners often lose by repeatedly buying cheap far-OTM options. Understanding intrinsic vs time value (next lesson) explains exactly why.