Options moneyness is a fundamental concept that describes the relationship between an option's strike price and the current price of the underlying stock. Understanding moneyness helps you choose the right options for your strategy and understand how different options will behave as the stock moves.
The Three Categories of Moneyness
Every option falls into one of three categories based on where the strike price sits relative to the current stock price:
In the Money (ITM): The option has intrinsic value. Exercising it now would be profitable.
At the Money (ATM): The strike price equals (or is very close to) the current stock price.
Out of the Money (OTM): The option has no intrinsic value. Exercising it now would not be profitable.
Moneyness for Call Options
For call options, the relationship is straightforward:
- ITM Call: Strike price is BELOW the current stock price
- ATM Call: Strike price equals the current stock price
- OTM Call: Strike price is ABOVE the current stock price
Example: Call Option Moneyness
Stock XYZ is trading at $100.
- $90 call is ITM (strike below stock price, intrinsic value of $10)
- $100 call is ATM (strike equals stock price)
- $110 call is OTM (strike above stock price, no intrinsic value)
Moneyness for Put Options
For put options, the relationship is reversed:
- ITM Put: Strike price is ABOVE the current stock price
- ATM Put: Strike price equals the current stock price
- OTM Put: Strike price is BELOW the current stock price
Example: Put Option Moneyness
Stock XYZ is trading at $100.
- $110 put is ITM (strike above stock price, intrinsic value of $10)
- $100 put is ATM (strike equals stock price)
- $90 put is OTM (strike below stock price, no intrinsic value)
Intrinsic Value and Time Value
Understanding moneyness is essential because it determines how much of an option's price comes from intrinsic value versus time value:
Intrinsic Value
Intrinsic value is the real, tangible value of an option if exercised immediately. Only ITM options have intrinsic value.
- Call intrinsic value: Stock price minus strike price (if positive)
- Put intrinsic value: Strike price minus stock price (if positive)
Time Value (Extrinsic Value)
Time value is everything else - the premium you pay for the possibility that the option becomes more valuable before expiration.
- All options have time value (until expiration)
- ATM options have the most time value
- Deep ITM and deep OTM options have less time value
Option Price = Intrinsic Value + Time Value
ITM options have both intrinsic and time value. OTM options have only time value.
How Moneyness Affects the Greeks
Delta
- ITM options: High delta (0.60 to 1.00 for calls, -0.60 to -1.00 for puts)
- ATM options: Delta around 0.50 for calls, -0.50 for puts
- OTM options: Low delta (0 to 0.40 for calls, 0 to -0.40 for puts)
Gamma
- ATM options have the highest gamma
- ITM and OTM options have lower gamma
- Gamma is highest near expiration for ATM options
Theta
- ATM options have the most time value, so they have the highest theta decay
- Deep ITM and deep OTM options have lower theta
Vega
- ATM options are most sensitive to volatility changes
- ITM and OTM options are less affected by IV changes
Choosing Strikes by Moneyness
Different moneyness levels suit different trading objectives:
Buying ITM Options
- Higher delta means more stock-like movement
- Less time decay relative to intrinsic value
- Lower percentage gains but higher probability of profit
- Good for: Wanting stock exposure with less capital
Buying ATM Options
- Balanced delta (around 50%)
- Most time value at risk to decay
- Highest vega exposure
- Good for: Trading volatility, moderate directional plays
Buying OTM Options
- Low delta means smaller dollar moves
- Cheapest premium (all time value)
- Highest percentage gains if successful, but low probability
- Good for: Lottery tickets, hedging, low-cost speculation
Example: Strike Selection
Stock at $100, you are bullish. Your options:
- $90 ITM call ($12.00): Moves $0.80 for every $1 stock move, expensive but high probability
- $100 ATM call ($4.00): Moves $0.50 for every $1 stock move, moderate cost and probability
- $110 OTM call ($1.00): Moves $0.20 for every $1 stock move, cheap but needs big move to profit
Moneyness for Spread Traders
Spread traders often think about moneyness when selecting strikes:
Credit Spread Strike Selection
- ATM short strike: Maximum premium, lower probability of profit
- OTM short strike: Less premium, higher probability of profit
Debit Spread Strike Selection
- ITM long strike: Higher cost, higher probability of profit
- OTM long strike: Lower cost, needs bigger move to profit
Deep ITM and Deep OTM
You will often hear options described as deep in the money or deep out of the money:
Deep ITM
- Strike far from current price (in your favor)
- Delta approaching 1.00 (or -1.00 for puts)
- Almost all intrinsic value, very little time value
- Behaves like owning stock
Deep OTM
- Strike far from current price (against you)
- Delta approaching 0
- Very cheap, but very unlikely to become profitable
- Often used for protection or lottery plays
Analyze Your Options Positions
Pro Trader Dashboard shows you the moneyness, Greeks, and profit probability for all your positions. Make better-informed strike selection decisions.
Summary
Options moneyness describes where an option's strike price sits relative to the current stock price. ITM options have intrinsic value, ATM options are at the current price with maximum time value, and OTM options have no intrinsic value. Understanding moneyness helps you select appropriate strikes for your strategy, understand how options will behave, and interpret the Greeks. As you develop your options trading skills, moneyness will become second nature in your analysis.
Continue learning with our guides on ATM vs OTM spreads and Greeks for spreads.