ITM, OTM, & ATM

In-the-Money (ITM), Out-of-the-Money (OTM), and At-the-Money (ATM) are three terms used to describe the relationship between an option’s strike price and the current price of the underlying stock.

A call option is considered to be In-the-Money (ITM) when the stock is trading higher than the option’s strike price, Out-of-the-Money (OTM) when it is trading for less than the option’s strike price, and At-the-Money (ATM) when it is trading at exactly or very close to the option’s strike price.

For example, the OEX Mar 390 Call would be In-the-Money if OEX was trading for more than $390, Out-of-the-Money if OEX was trading for less than $390, and At-the-Money if OEX was trading for exactly $390. If an option is In-the-Money, it has intrinsic value (value if it were to be exercised immediately).

Intrinsic Value

Intrinsic value is the difference between the stock price and the ITM strike price. In other words, it is the ITM portion of an option’s price. For example, if a stock is trading at $37.50 and the strike price on the option is $35, the intrinsic value in the option is $2.50.

Intrinsic value can never be a negative number, but the option does not need to be ITM to have some time value (this is called extrinsic value). Interest rates and stock dividends, if applicable, can also play a small role in the premium.

The General Pricing Rule

In-the-Money options are more expensive, but their value also increases more quickly as the price of the stock goes up.

Out-of-the-Money options are less expensive, but their values increases more slowly as the price of the stock goes up.