Moneyness
ITM, ATM, OTM: the relationship between current price and strike price explained
What Is Moneyness?
Moneyness is the term describing the relationship between the current price of the underlying asset and an option’s strike price. The concept is fundamental to understanding how options behave and how they are valued. There are three main categories: in the money (ITM), at the money (ATM) and out of the money (OTM). Which category an option falls into has a dramatic impact on its value, its probability of expiring with value, and the risk-reward of the trade. Understanding moneyness is one of the first steps toward building effective options strategies.
In the Money (ITM)
An option is in the money when the current price of the underlying already provides intrinsic value. For a call, that means the asset price is above the strike. For a put, it means the asset price is below the strike. ITM options carry greater intrinsic value, meaning that exercising immediately would produce a gain. For example, an XYZ call with a $100 strike is ITM when XYZ trades at $105, with $5 of intrinsic value. ITM options have a higher delta (closer to 1.0 for calls, closer to −1.0 for puts), meaning they behave more like the underlying asset. ITM options also carry less time value in proportion to their price, because most of what you pay for them is intrinsic value.
At the Money (ATM)
An option is at the money when the current price of the underlying is approximately equal to the option’s strike. An ATM call and an ATM put are priced almost identically in that situation. ATM options have zero or very little intrinsic value; all of their value is time value. ATM options have a delta of roughly 0.5 (for calls) or −0.5 (for puts), meaning they behave like a genuine coin-flip on market direction. ATM options are the most sensitive to changes in implied volatility because all of their value is speculative. They also experience the largest change in delta when the underlying price moves. ATM options typically carry the highest trading volume.
Out of the Money (OTM)
An option is out of the money when the current price of the underlying provides no intrinsic value. For a call, that means the asset price is below the strike. For a put, it means the asset price is above the strike. OTM options have zero intrinsic value; all of their value is time value. They are the cheapest options because they need the market to move in their favour just to reach breakeven. For example, an XYZ call with a $110 strike is OTM when XYZ trades at $100, requiring a $10 rise just to have intrinsic value. OTM options have a low delta, meaning they function as a highly leveraged bet. Although cheaper, they carry a greater probability of expiring worthless, which means a total loss.
Why Moneyness Matters in Practice
Moneyness selection is one of the most important decisions an options trader makes. Buying OTM options offers a favourable risk-reward ratio but a low probability of success. Buying ATM options is a more balanced bet with better odds but less leverage. Buying ITM options is like taking a leveraged position in the underlying with higher odds of success but a lower potential return. Selling OTM options carries high odds of success but requires patience. Selling ITM options is risky but generates large premiums. Your trading strategy and your risk tolerance should guide the choice of moneyness on every trade.