If you’ve spent any time reading about options trading, you’ve seen the terms “in the money” and “out of the money” everywhere — in strategy guides, broker platforms, and options chains. These terms describe where an option’s strike price sits relative to the current stock price, and understanding them is foundational to everything else in options trading.
This guide explains exactly what in the money and out of the money mean, why it matters for strategy selection, and how moneyness affects the price, behavior, and risk of every options contract you’ll ever trade.
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What Does “In the Money” Mean?
An option is in the money (ITM) when it has intrinsic value — meaning if you exercised it right now, the trade would be immediately profitable.
- For a call option: In the money means the stock price is above the strike price. If XYZ is trading at $55 and you hold the $50 call, your option is $5 in the money. You have the right to buy at $50 and the stock is worth $55 — that $5 difference is intrinsic value.
- For a put option: In the money means the stock price is below the strike price. If XYZ is trading at $45 and you hold the $50 put, your option is $5 in the money. You have the right to sell at $50 when the stock is only worth $45 — again, $5 in intrinsic value.
The deeper in the money an option is, the more it behaves like the stock itself. A deeply ITM call option moves almost dollar-for-dollar with the underlying — its Delta approaches 1.00. A deeply ITM put option moves almost dollar-for-dollar in the opposite direction — its Delta approaches -1.00.
What Does “Out of the Money” Mean?
An option is out of the money (OTM) when it has no intrinsic value — the strike price hasn’t been reached yet, so exercising it right now would make no sense.
- For a call option: Out of the money means the stock price is below the strike price. If XYZ is trading at $45 and you hold the $50 call, your option is $5 out of the money. You have the right to buy at $50 when the stock is only worth $45 — exercising serves no purpose.
- For a put option: Out of the money means the stock price is above the strike price. If XYZ is trading at $55 and you hold the $50 put, your option is $5 out of the money. You have the right to sell at $50 when the stock is worth $55 — again, exercising makes no sense.
Out of the money options consist entirely of extrinsic value — also called time value. They have no intrinsic value by definition. Their price reflects only the probability that the stock will move past the strike price before expiration, multiplied by time remaining and implied volatility.
What Does “At the Money” Mean?
A third term completes the picture: at the money (ATM). An option is at the money when the strike price is equal or very close to the current stock price. If XYZ is trading at $50 and you’re looking at the $50 call or $50 put, those options are at the money.
At-the-money options have the highest extrinsic value of any option on the chain — and the fastest Theta decay. They have a Delta of approximately 0.50, meaning they move about $0.50 for every $1 move in the underlying.
| Call Option | Put Option | |
|---|---|---|
| In the Money (ITM) | Stock price > Strike price | Stock price < Strike price |
| At the Money (ATM) | Stock price ≈ Strike price | Stock price ≈ Strike price |
| Out of the Money (OTM) | Stock price < Strike price | Stock price > Strike price |
How Moneyness Affects Option Price
The relationship between a strike price and the current stock price — called moneyness — directly determines how an option is priced and how it behaves.
- Intrinsic value is the real, immediate value of an option if exercised right now. Only in-the-money options have intrinsic value. A $50 call with the stock at $55 has $5 of intrinsic value. A $50 call with the stock at $45 has zero intrinsic value.
- Extrinsic value (time value) is the additional premium above intrinsic value that the market charges for time remaining and uncertainty. Every option has extrinsic value until it expires. ATM options have the most extrinsic value. Deep ITM and deep OTM options have very little.
Example:
- XYZ is trading at $50
- The $45 call (deep ITM) is trading at $5.80 — $5.00 intrinsic + $0.80 extrinsic
- The $50 call (ATM) is trading at $2.00 — $0 intrinsic + $2.00 extrinsic
- The $55 call (OTM) is trading at $0.60 — $0 intrinsic + $0.60 extrinsic
- The $60 call (deep OTM) is trading at $0.10 — $0 intrinsic + $0.10 extrinsic
As you go further out of the money, the option becomes cheaper but has a lower probability of expiring with value. As you go deeper in the money, the option becomes more expensive but moves more like the stock itself.
How Moneyness Affects Delta
Delta is the Greek that most directly reflects moneyness. It measures how much an option’s price changes for every $1 move in the underlying stock.
- Deep ITM options have Delta close to 1.00 (calls) or -1.00 (puts) — they move almost dollar-for-dollar with the stock
- ATM options have Delta close to 0.50 (calls) or -0.50 (puts)
- OTM options have Delta between 0 and 0.50 — the further OTM, the lower the Delta
- Deep OTM options have Delta close to 0 — they barely move even when the stock moves
Delta also approximates the probability that an option will expire in the money. A 0.30 Delta call has approximately a 30% chance of expiring ITM. A 0.70 Delta call has approximately a 70% chance. This is why income traders who sell covered calls and cash-secured puts typically target the 20-35 Delta range — they want high probability of expiring worthless while still collecting meaningful premium.
| Moneyness | Approximate Delta (Call) | Probability ITM at Expiration |
|---|---|---|
| Deep ITM | 0.80–1.00 | 80–100% |
| Slightly ITM | 0.55–0.80 | 55–80% |
| At the Money | ~0.50 | ~50% |
| Slightly OTM | 0.20–0.45 | 20–45% |
| Deep OTM | 0.01–0.20 | 1–20% |
ITM vs OTM for Buyers: What’s the Difference?
When you’re buying options, the moneyness of the option you choose dramatically affects the risk and reward profile of your trade.
- Buying ITM options gives you higher Delta — more exposure to the stock’s movement — and lower extrinsic value relative to the option’s total price. ITM options are more expensive in absolute terms but more capital-efficient on a per-dollar-of-stock-exposure basis. They’re also more forgiving — the stock doesn’t need to move as far to start generating profit.
- Buying OTM options gives you lower Delta and lower absolute cost — you can control 100 shares for significantly less capital. But the stock needs to make a larger move to reach profitability, and the entire premium is at risk. OTM options expire worthless more often than ITM options by definition.
- Buying ATM options sits in the middle — maximum extrinsic value, approximately 50% probability of expiring ITM, and the steepest Theta decay of any strike.
For most options buyers, slightly OTM to ATM options represent the best balance of cost, leverage, and probability. Deep OTM options — sometimes called “lottery tickets” — are cheaper but expire worthless the vast majority of the time.
ITM vs OTM for Sellers: What’s the Difference?
When you’re selling options for income — as in covered calls, cash-secured puts, or credit spreads — moneyness determines how much premium you collect versus how much risk you take on.
- Selling ITM options collects more premium but creates a higher probability of assignment or the trade going against you. An ITM covered call means the stock is already above your strike — you’re likely to have shares called away at expiration.
- Selling OTM options collects less premium but gives you a higher probability of the option expiring worthless — which is your ideal outcome as a seller. Most income traders sell OTM options in the 20-35 Delta range, targeting the 65-80% probability of expiring worthless.
- Selling ATM options collects the most extrinsic value but comes with the highest assignment risk and the most sensitivity to stock movement.
The income trader’s standard approach: sell OTM options with enough premium to justify the trade while maintaining a high probability of success. The exact strike selection depends on how much premium is available, the trader’s risk tolerance, and the implied volatility environment.
Moneyness in Practice: Covered Calls
The covered call is the most common example of moneyness in action for income traders. When you sell a covered call, your strike selection — and its moneyness — determines how your trade behaves.
- Selling an OTM covered call (strike above current price): You collect less premium but retain more upside if the stock rallies. Higher probability of expiring worthless. Standard choice for most income traders.
- Selling an ATM covered call (strike at current price): You collect maximum extrinsic value but have roughly a 50% chance of having shares called away. Appropriate when you’re willing to sell at the current price.
- Selling an ITM covered call (strike below current price): You collect more premium including intrinsic value, but assignment is highly likely. Effectively a commitment to sell your shares at the strike. Sometimes used when the trader wants to exit a position while still generating income.
For a detailed walkthrough of covered call strike selection, see our Covered Call Strategy guide.
Moneyness and Expiration: What Happens at Expiry
Understanding what happens to ITM and OTM options at expiration is essential for every options trader.
- OTM options at expiration expire worthless. If you bought them, you lose the entire premium paid. If you sold them, you keep the entire premium collected — which is the income trader’s desired outcome.
- ITM options at expiration are automatically exercised by most brokers unless you instruct otherwise. If you hold an ITM long call, you’ll be assigned 100 shares of the stock at the strike price. If you hold an ITM long put, your shares will be sold at the strike price. If you sold an ITM option, the counterparty will exercise against you — you’ll be assigned.
- ATM options at expiration are the trickiest. Whether an option finishes ITM or OTM by even a penny determines whether it gets exercised. Options that are exactly at the money at expiration introduce “pin risk” — uncertainty about whether you’ll be assigned. Most traders close or roll positions before expiration to avoid this ambiguity.
Frequently Asked Questions About ITM and OTM Options
What does in the money mean for a call option?
A call option is in the money when the stock price is above the strike price. For example, if a stock is trading at $55 and you hold the $50 call, your option is $5 in the money — you have the right to buy at $50 when the stock is worth $55, giving the option $5 of intrinsic value.
What does out of the money mean for a put option?
A put option is out of the money when the stock price is above the strike price. For example, if a stock is trading at $55 and you hold the $50 put, your option is $5 out of the money — the right to sell at $50 has no value when the stock is trading at $55.
Do out of the money options expire worthless?
Out of the money options expire worthless if the stock doesn’t move past the strike price by expiration. Statistically, the majority of options contracts expire worthless — which is why selling options is generally a positive expected value activity when done consistently and with good position sizing.
Should I buy in the money or out of the money options?
It depends on your strategy and risk tolerance. In the money options cost more but have higher Delta, lower extrinsic value, and are more forgiving on the stock’s required move. Out of the money options cost less but require a larger move to profit and expire worthless more often. Most buyers target slightly OTM to ATM options as the best balance of cost and probability.
What strike price is at the money?
An option is at the money when its strike price equals or is very close to the current stock price. If a stock is trading at $50.25, the $50 strike call and put would both be considered approximately at the money.
How does moneyness affect Delta?
Delta and moneyness are directly linked. Deep ITM options have Delta close to 1.00 (calls) or -1.00 (puts). ATM options have Delta of approximately 0.50. Deep OTM options have Delta approaching 0. Delta also approximates the probability that an option will expire in the money — a 0.30 Delta call has roughly a 30% chance of finishing ITM.
What is intrinsic value in options?
Intrinsic value is the immediate, real value of an option if exercised right now. Only in the money options have intrinsic value. A $50 call with the stock at $55 has $5 of intrinsic value. An out of the money or at the money option has zero intrinsic value — its entire price consists of extrinsic value (time value).
What happens to in the money options at expiration?
In the money options are automatically exercised at expiration by most brokers. If you hold an ITM long call, you’ll receive 100 shares at the strike price. If you hold an ITM long put, your shares will be sold at the strike price. If you sold an ITM option, you’ll be assigned the opposite obligation. Most traders close or roll ITM positions before expiration to avoid unexpected assignments.
