When trading options, you will constantly hear terms like ITM, ATM, and OTM. These abbreviations describe an option's moneyness, which tells you the relationship between the strike price and the current stock price. Understanding moneyness is fundamental to making smart options trading decisions.
What is Moneyness?
Moneyness describes where an option's strike price is relative to the current market price of the underlying stock. It tells you whether an option has intrinsic value right now and helps you understand the option's behavior and risk profile.
The simple version: Moneyness answers the question: "If I exercised this option right now, would I make money?" ITM options would, OTM options would not, and ATM options are right at the breakeven point.
In The Money (ITM)
An option is in the money when exercising it immediately would result in a profit (ignoring the premium paid). ITM options have intrinsic value.
ITM Call Options
A call option is ITM when the stock price is above the strike price. You have the right to buy at a price lower than the current market price.
Example: ITM Call
Stock XYZ trades at $55.
- A $50 strike call is ITM by $5
- A $45 strike call is ITM by $10 (deep ITM)
- A $52 strike call is ITM by $3 (slightly ITM)
All of these calls have intrinsic value because you could exercise and immediately profit.
ITM Put Options
A put option is ITM when the stock price is below the strike price. You have the right to sell at a price higher than the current market price.
Example: ITM Put
Stock XYZ trades at $45.
- A $50 strike put is ITM by $5
- A $55 strike put is ITM by $10 (deep ITM)
- A $48 strike put is ITM by $3 (slightly ITM)
These puts have intrinsic value because you could exercise and sell above market price.
At The Money (ATM)
An option is at the money when the strike price equals (or is very close to) the current stock price. ATM options have no intrinsic value but typically have the highest extrinsic (time) value.
Example: ATM Options
Stock ABC trades at $100.
- A $100 strike call is ATM
- A $100 strike put is ATM
If the stock trades at $100.50, the $100 strike is still considered ATM (close enough). Some traders might call the $101 or $99 strikes "near the money."
Out Of The Money (OTM)
An option is out of the money when exercising it would not be profitable. OTM options have zero intrinsic value. Their entire premium is extrinsic value.
OTM Call Options
A call option is OTM when the stock price is below the strike price. Why would you exercise the right to buy at $55 when the stock trades at $50?
Example: OTM Call
Stock XYZ trades at $50.
- A $55 strike call is OTM by $5
- A $60 strike call is OTM by $10 (far OTM)
- A $52 strike call is OTM by $2 (slightly OTM)
None of these calls have intrinsic value right now.
OTM Put Options
A put option is OTM when the stock price is above the strike price. Why sell at $45 when the stock trades at $50?
Example: OTM Put
Stock XYZ trades at $50.
- A $45 strike put is OTM by $5
- A $40 strike put is OTM by $10 (far OTM)
- A $48 strike put is OTM by $2 (slightly OTM)
These puts have no intrinsic value at current prices.
Quick Reference Table
Here is an easy way to remember moneyness:
| Option Type | ITM When | OTM When |
|---|---|---|
| Call | Stock > Strike | Stock < Strike |
| Put | Stock < Strike | Stock > Strike |
Why Moneyness Matters
Understanding moneyness helps you in several key ways:
1. Choosing Strike Prices
Different moneyness levels suit different strategies:
- ITM options: Higher probability of profit, but cost more and offer lower percentage returns
- ATM options: Balance between cost and probability, highest time value
- OTM options: Cheaper, but lower probability of profit and higher percentage returns if successful
2. Understanding Delta
Moneyness directly relates to an option's delta:
- Deep ITM: Delta near 1.0 (moves almost dollar-for-dollar with stock)
- ATM: Delta around 0.50 (50% chance of finishing ITM)
- Deep OTM: Delta near 0 (minimal price movement with stock)
3. Time Decay Impact
ATM options experience the most time decay because they have the most extrinsic value. Deep ITM and far OTM options have less time value to lose.
Trading Strategies by Moneyness
When to Use ITM Options
- Stock replacement strategies (using calls instead of shares)
- When you want higher delta exposure
- Conservative directional plays
- When implied volatility is high (you pay less time value)
When to Use ATM Options
- When you expect significant movement but unsure of magnitude
- Selling premium (maximum time decay)
- Straddles and strangles
When to Use OTM Options
- High conviction directional plays with limited capital
- Hedging portfolios cheaply
- Lottery ticket trades (low cost, high potential)
- Selling for income in credit spreads
Common Mistakes with Moneyness
- Always buying cheap OTM options: They are cheap for a reason. Most expire worthless.
- Ignoring probability: A $5 OTM option needs a bigger move than a $1 OTM option
- Not considering time: OTM options need both direction and time on your side
- Overpaying for deep ITM: At some point, just buy the stock instead
Moneyness Changes Over Time
Remember that moneyness is not static. As the stock price moves, an option's moneyness changes:
- Your OTM call can become ITM if the stock rallies
- Your ITM put can become OTM if the stock rises
- ATM options are constantly on the edge
Track Your Options by Moneyness
Pro Trader Dashboard shows you exactly which options are ITM, ATM, or OTM in your portfolio. See how moneyness affects your positions in real-time.
Summary
Moneyness tells you the relationship between an option's strike price and the stock's current price. ITM options have intrinsic value, ATM options are at the breakeven point, and OTM options have only extrinsic value. Understanding these concepts helps you choose the right strikes for your trading strategy and manage risk effectively.
Ready to learn more? Check out our guide on intrinsic value or learn about options premiums.