Moneyness: ITM, ATM, OTM
Where the strike sits relative to the stock — and why it changes everything about the trade.
Moneyness describes where a strike sits relative to the current stock price. It decides how much the option costs, how fast it moves, and how likely it is to pay off. A call is in the money when the strike is below the stock price; a put is in the money when the strike is above it.
The three states
| Term | Calls | Puts | Meaning |
|---|---|---|---|
| ITM (in the money) | strike below price | strike above price | has real value if exercised now |
| ATM (at the money) | strike ≈ price | strike ≈ price | closest strike to the stock |
| OTM (out of the money) | strike above price | strike below price | only time value; worthless if it expires here |
Intrinsic value vs time value
Intrinsic value is what the option is worth if you exercised it right now — stock − strike for a call, strike − stock for a put, never below zero. Everything you pay above intrinsic value is time value: the market pricing the chance the stock keeps moving your way before expiry.
Time value always decays to zero
At expiry an option is worth exactly its intrinsic value — the time value is gone. An OTM option, which is all time value, expires worthless. This is the single most important fact for a new options buyer.Which one should you buy?
- ITM — expensive, but moves almost like the stock and decays slowly. Lower risk, lower leverage.
- ATM — the most time value and the most sensitivity to a move (highest gamma). The classic directional bet.
- OTM — cheap lottery tickets. Big payoff if you are right and the stock crosses your strike, worthless if it does not.