6 Quick Examples To Mastering Option Moneyness (ITM, OTM & ATM)

option moneyness

Options are classified into three very distinct categories, which are known as option moneyness, and it’s important to get a handle on these types and what they mean before you even think about starting to trade in options.

Option moneyness is categorized as:

  1. In-The-Money (ITM)
  2. Out-of-The-Money (OTM)
  3. At-The-Money (ATM)

We have created a helpful, quick Video Tutorial on Option Moneyness  found in the education portal which we would recommend you watch as well, to help get a handle on this issue.

Moneyness in single options contracts is a fundamental concept to master when trading and it does get harder to understand once you start to add sophisticated options strategies to the mix, so it’s important to take the time to figure it out.

In-The-Money (ITM)

This does not mean that the trader is going to make a profit necessarily – it is a description of the position of the strike price against the stock price at any one time.

For example, if you have a call option and your stock price is greater than the current strike price that option is said to be in-the-money. It’s just describing the relativity of the two prices to each other and not the trader’s profitability. If you have a put option and the strike price is higher than the stock price, then your position is in-the-money (see example charts below)

Out-Of-The-Money (OTM)

Again, this doesn’t mean the trader has lost money on a trade, or that he/she is out of pocket, it’s a generic description of where the strike and stock prices are in relation to each other, for your particular trade.

For a position to be considered OTM, with a call option the stock price would need to be lower than the strike price, and for a put option, the stock price would need to be higher than the strike price.

At-The-Money

This means both prices are at the same level and is no different whether you are trading in calls or puts. It shows a parity of price levels across stock and strike prices and is usually a balance point before the stock falls or rises.

 

The relationships between ITM, OTM, and ATM are all used to help determine the intrinsic value which is a key factor in option pricing overall. overall. An options pricing is based on two components – intrinsic value and time/extrinsic value so an option with intrinsic value is In-The-Money and will have some value at the expiration date.

You just need to look at the trade you are making and consider if this trade was to expire today, could I make money on it. If yes, this is the intrinsic value. Bear in mind also that all out-of-the-money options have no intrinsic value and expire worthless.

Here Is Our Quick Guide To Option Moneyness:

In-The-Money (ITM)

For a long call option, the option will be deemed to be In-The-Money if the strike price is below the current value of the stock trading in the market.

Call ITM

However, for a long put option, the reverse is true – the option will be In-The-Money if the strike price is above the current value of the stock trading in the market.

Put ITM

Out-Of-The-Money (OTM)

So, if you take the logic of that, for a long call option, the option would be considered to be Out-of-The-Money if the strike price is above the current value of the stock trading in the market.

Call OTM

Again, for a long put option it’s the opposite stance, so the option would be Out-of-The-Money if the strike price is below the current value of the stock trading in the market.

Put OTM

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At-The-Money (ATM)

At-The-Money is when the strike price and the stock price are the same so this applies to both long calls and long puts.

Call ATM

With At-the-Money it is rare to have options with the same strike price as the stock so most options traders consider anything within a couple of points to be At-The-Money. It’s the “tipping point” between an option being OTM and ITM.

Put ATM

What About Short Options?

Short option contracts are just the mirror image of the above long contract payoff diagrams. Most of the option moneyness examples we have here would be the reverse for short option contracts.

If you are interested in learning more about trading with short options then we suggest taking a little time out to watch these two video tutorials on Short Calls and Short Puts from our video tutorial library.

If you have any further questions regarding moneyness then why not check out the Answer Vault on our website: https://optionalpha.com/members/answer-vault where we have listened to the most common questions asked by our members and compiled the responses to create an extended Frequently Asked Questions section. If anyone has asked the same question as you about moneyness the answer will be in the vault.

And as always, please add your comments and suggestions below!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he’s a Full-time Options Trader and Real Estate Investor.

He’s been interviewed on dozens of investing websites/podcasts and he’s been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.

  • Bill Place

    Great job as usual Kirk

  • I understand what ITM & OTM mean, but I can’t seem to make heads or tails of your charts. If you are shooting to educate the beginner then I’d make your charts more clear (i.e. a beginner has probably never seen this type of chart even if they are standard in the options trading world).

    • I see what you mean Penelope and I’ll try to add more detailed charts going forward. Thanks for the comment!

      • Bryan

        Totally agree us rookies need the dumbified versions haha

  • Thanks for letting me know I’ll look into it.

    • Mike Allums

      Actually, as I reviewed a number of the articles/blog posts I found that several video hyperlinks didn’t work. Just an FYI.

  • The ecourse is 100% free (just need your email) and our membership is $47 per month currently after a 7 day trial.