Moneyness: ITM, ATM and OTM

Moneyness describes the relationship between an option's strike price and the current price of the underlying. An option is in the money (ITM) if it has intrinsic value, at the money (ATM) if the strike is at or near the current price, and out of the money (OTM) if it has no intrinsic value. Moneyness affects an option's price, how sensitive it is to moves in the underlying, how fast it decays and how likely it is to be exercised.

Moneyness for calls and puts#

Calls and puts are mirror images. A strike below the current price makes calls in the money and puts out of the money.

call is ITM when underlying price > strike
put is ITM when underlying price < strike

How moneyness changes option behaviour#

See Delta, Gamma and Theta.

Moneyness and probability#

A common rule of thumb treats delta as the rough probability that an option finishes in the money. An ATM option is roughly 50%, a 0.20 delta OTM option roughly 20%. This is an approximation; strictly, a related figure from pricing models (N(d2) in Black Scholes) is the risk neutral probability. See Black-Scholes Model.

Measuring moneyness precisely#

Traders often go beyond ITM, ATM and OTM labels:

• Percentage moneyness: strike divided by underlying price, such as 90% or 110%.
• Delta: describing options as "25 delta puts" or "10 delta calls", common in volatility trading. See Volatility Smile and Skew.
• Log moneyness and standard deviations: used in quantitative models to compare across expiries and volatility levels.

Moneyness changes over time#

Moneyness is not fixed. An OTM call becomes ITM if the stock rises past the strike. Near expiration, small moves can flip an option between ITM and OTM, which is why at the money options are so sensitive near expiry. See Option Expiration Dates.

Choosing moneyness for a strategy#

Common mistakes#

• Thinking ITM means profitable: an ITM option bought for more than its intrinsic value can still lose money.
• Overbuying far OTM options because they are cheap.
• Forgetting moneyness shifts as the underlying moves.

Frequently asked questions#

What does in the money mean for options?#

A call is in the money when the underlying price is above the strike; a put is in the money when the underlying price is below the strike.

Is it better to buy ITM or OTM options?#

ITM options cost more but behave more like the underlying and need less movement; OTM options are cheaper but less likely to pay off.

What is an at the money option?#

An option whose strike is equal or very close to the current underlying price, which gives it the most time value.

Next, learn what happens when options are used in Exercise and Assignment.