What do in the money, at the money and out of the money mean?

Every option has a strike price, the price at which it lets its owner buy the stock (a call) or sell it (a put). Moneyness is simply where that strike sits compared with the stock’s current price. It is a description of today’s position, not a prediction, and it changes every time the stock moves.

The test is one question: if you exercised the option this second, would you be better off than trading the stock at its market price? If yes, the option is in the money, and the size of that advantage is its intrinsic value. If the strike and the stock price are the same, it is at the money. If exercising would be worse than trading at the market, it is out of the money.

In the drawing at the top of the page, a hypothetical stock trades at $50. The strikes below the stock price are in the money for calls and out of the money for puts; the strikes above it are the reverse. Being in the money is not the same as being profitable, as the expiration section shows: that depends on what you paid.

Moneyness
Where an option’s strike price sits relative to the current price of the underlying: in the money, at the money or out of the money.
In the money (ITM)
An option with intrinsic value: a call whose strike is below the stock price, or a put whose strike is above it.
At the money (ATM)
An option whose strike equals the stock price. In practice, traders use it for the listed strike closest to the stock price.
Out of the money (OTM)
An option with no intrinsic value: a call whose strike is above the stock price, or a put whose strike is below it.

ITM, ATM and OTM for calls and for puts

Calls and puts mirror each other, which is where most beginners slip. A call is a right to buy, so it gains from a low strike. A put is a right to sell, so it gains from a high strike. With the hypothetical stock at $50, the six cases are in the list below.

So one strike is in the money for one type and out of the money for the other: the $45 strike is an ITM call and an OTM put. On an options chain the in-the-money strikes are usually shaded, on opposite sides for calls and puts. Traders also say deep in the money or far out of the money for strikes a long way from the stock price; these have no fixed cut-off.

  • $45 call: in the money. It lets you buy at $45 a stock worth $50, an advantage of $5.
  • $50 call: at the money. Buying at $50 a stock worth $50 is no advantage.
  • $55 call: out of the money. Nobody would exercise a right to pay $55 for a $50 stock.
  • $55 put: in the money. It lets you sell at $55 a stock worth $50, an advantage of $5.
  • $50 put: at the money.
  • $45 put: out of the money. Selling at $45 a stock worth $50 would be worse than selling at the market.

What is the intrinsic value of an option?

Intrinsic value is the amount by which an option is in the money, per share. For a call it is the stock price minus the strike; for a put, the strike minus the stock price. If the result is negative, the intrinsic value is zero: an option is a right, not an obligation, so it can never be worth less than nothing to its owner.

A standard US stock option covers 100 shares, so $5.00 of intrinsic value is $500 per contract. Intrinsic value moves dollar for dollar with the stock while the option stays in the money: if the stock rises from $50 to $52, the $45 call’s intrinsic value rises from $5.00 to $7.00. This is unrelated to the intrinsic value of a company, which is an estimate of what a business is worth.

  • Call intrinsic value = stock price − strike, and never less than $0.
  • Put intrinsic value = strike − stock price, and never less than $0.
  • $45 call with the stock at $50: $50 − $45 = $5.00.
  • $55 call with the stock at $50: $50 − $55 is negative, so $0.
  • $55 put with the stock at $50: $55 − $50 = $5.00.
  • $45 put with the stock at $50: $45 − $50 is negative, so $0.
Intrinsic value (of an option)
The amount an option is in the money: stock price minus strike for a call, strike minus stock price for a put, and never below zero.

Premium = intrinsic value + time value: worked examples

The price of an option, its premium, has two parts. Intrinsic value is the part you could capture by exercising now. Time value, also called extrinsic value, is everything above that: what buyers pay for the chance that the stock moves further in their favor before expiration. So time value = premium − intrinsic value.

Hypothetical premiums for the stock at $50 with about 30 days to expiration, as in the drawing below. The $45 call costs $5.50: $5.00 of intrinsic value and $0.50 of time value. The $50 call costs $2.10, all of it time value. The $55 call costs $0.50, also all time value. On the put side, the $55 put costs $5.30 ($5.00 intrinsic, $0.30 time), the $50 put $1.95 and the $45 put $0.35, both entirely time value.

Two patterns are worth remembering. Out-of-the-money and at-the-money options are made of time value only, so everything you pay for them can disappear. And time value is usually largest at the money and shrinks as you move deep into or far out of the money. It grows with more time to expiration and with higher implied volatility, and it decays toward zero as expiration approaches.

Time value (extrinsic value)
The part of an option’s premium above its intrinsic value: premium minus intrinsic value. It reflects time left and expected movement, and it is zero at expiration.
Premium
The price of an option, quoted per share. A standard US stock option covers 100 shares, so a $2.10 premium costs $210 per contract.

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Six stacked bars for a stock at $50, with solid green for intrinsic value and hatching for time value. Calls: the $45 call (ITM) at $5.50, 5.00 plus 0.50; the $50 call (ATM) at $2.10, all time value; the $55 call (OTM) at $0.50, all time value. Puts: the $45 put (OTM) at $0.35 and the $50 put (ATM) at $1.95, both all time value; the $55 put (ITM) at $5.30, 5.00 plus 0.30. Between the groups: premium = intrinsic value + time value. A note reads: hypothetical premiums per share, stock at $50.

What happens to ITM, ATM and OTM options at expiration?

At expiration there is no time left, so time value is zero and an option is worth exactly its intrinsic value. An out-of-the-money option expires worthless. An in-the-money option is worth the amount it is in the money, and whether that is a profit depends on the premium you paid.

Take the three hypothetical calls above, one contract each, held to expiration. The drawing below shows four closing prices. If the stock closes at $53, the $45 call is worth $8.00, a gain of ($8.00 − $5.50) × 100 = $250; the $50 call is worth $3.00, a gain of $90; the $55 call is worthless, a loss of $50, all of its premium. If the stock closes unchanged at $50, the $45 call is still in the money and worth $5.00, yet it loses $50, because its $0.50 of time value is gone; the $50 call loses its whole $210.

The break-even at expiration for a call is the strike plus the premium: $50.50, $52.10 and $55.50 for the three contracts. For a put it is the strike minus the premium. In the money is not the same as past the break-even.

One practical point: options that are in the money at expiration are normally exercised. Under its exercise-by-exception procedure, the Options Clearing Corporation (OCC) exercises expiring stock options that are in the money by $0.01 or more unless instructed otherwise, and brokers may apply their own thresholds, so a long call can turn into 100 shares you must pay for. The options expiration guide covers exercise, assignment and the deadlines.

Turn your phone sideways to read the image. Tap to close.

A table for three calls and four closing prices at expiration: $47, $50, $53 and $57. In each cell the top number is what the call is worth and the bottom number is the profit or loss on one contract of 100 shares. $45 call, paid $5.50: $2.00 and −$350; $5.00 and −$50; $8.00 and +$250; $12.00 and +$650. $50 call, paid $2.10: $0.00 and −$210; $0.00 and −$210; $3.00 and +$90; $7.00 and +$490. $55 call, paid $0.50: $0.00 and −$50 three times, then $2.00 and +$150. A note reads: at expiration only intrinsic value is left; in the money is not the same as profitable.

How does moneyness relate to delta?

Delta estimates how much an option’s price changes when the stock moves $1. It is tied closely to moneyness. A deep in-the-money call behaves almost like the stock, so its delta is close to 1. An at-the-money call has a delta near 0.50: it gains about half of what the stock gains. A far out-of-the-money call barely reacts, so its delta is close to 0. Puts are the same with a minus sign, from near −1 deep in the money to near 0 far out of it.

The reason is intrinsic value. An in-the-money option already has intrinsic value that moves dollar for dollar with the stock, so most of each $1 move shows up in its price. An out-of-the-money option has none, and its price moves only as far as the market thinks the move has improved its chances.

Hypothetical, for the three calls above: deltas of about 0.85, 0.50 and 0.20. If the stock rises $1, the $45 call gains about $0.85 a share and the $55 call about $0.20. In dollars the in-the-money call gains more; in percent, the $55 call’s $0.20 on a $0.50 premium is the bigger move, which is why out-of-the-money options look so attractive when they work. Delta also changes as the stock moves and as expiration nears, and many traders read it as a rough, model-based estimate of the chance of finishing in the money, not a forecast. The options Greeks guide explains each one.

ITM vs OTM: what are the cost and risk trade-offs?

No moneyness is better in general. Each one trades cost against how far, and how fast, the stock has to move; matching the strike to a target and an expiration date for a specific trade is covered in how to choose a strike price. The trade-offs:

  • In the money: the highest premium, because you pay for intrinsic value. It moves most like the stock, needs the smallest move to break even and has the least time value to lose. More dollars are at risk per contract, and the percentage gain on a good move is smaller.
  • At the money: the middle ground. Its premium is all time value and it carries the most of it, so time decay costs it the most in dollars, but it responds quickly once the stock moves.
  • Out of the money: the lowest premium, which is the temptation. The stock must travel past the strike plus the premium to break even at expiration, and the option expires worthless whenever it does not reach the strike. A low price per contract is not a low risk: the whole premium is at stake.
  • For sellers the picture reverses: an out-of-the-money option sold is more likely to expire worthless, but the premium collected is small and the loss, if the stock runs through the strike, can be many times larger.

Common mistakes with moneyness

Most errors with moneyness come from forgetting one of the points above. The ones that cost money most often:

  • Mixing up the direction. A strike above the stock price is out of the money for a call and in the money for a put.
  • Thinking in the money means profitable. The $45 call above is in the money with the stock at $50, and still loses if the stock is below $50.50 at expiration.
  • Treating a cheap premium as a small risk. A $0.50 option can lose 100% of its price, and buying more contracts because they are cheap multiplies that.
  • Forgetting that moneyness moves. A call that is out of the money today can be in the money tomorrow and back again; delta and time value shift with it.
  • Ignoring expiration. Time value is gone at expiration, and an option left slightly in the money can be exercised into a stock position you did not plan for.
  • Comparing premiums without splitting them. Two options with similar prices can be very different trades if one is mostly intrinsic value and the other all time value.