Option Moneyness [Explained] - Option Posts

Option Moneyness [Explained]

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Options are classified as In-the-Money (ITM), Out-Of-The-Money (OTM), and At-The-Money (ATM), three categories which describe the position of the option strike price relative to the current stock price. These categories are called option “moneyness.” Let’s take a look at these moneyness categories with examples.

In-the-money (ITM)

An option contract is said to be in-the-money when the contract has intrinsic value. A quick way to remember this is that IN-the-money (ITM) options have INtrinsic value. An ITM option has value at expiration. The value of an ITM call option comes from the ability to buy shares for less than the current stock price, while ITM put options enable the selling of shares for more than the current stock price.

This is not to say that an ITM option will necessarily produce profit for you. Call options are ITM when the stock price is greater than the strike price, regardless of whether you are the buyer or seller. Similarly, put options are ITM when the stock price is less than the strike price.

Out-of-the-money (OTM)

An option contract is OTM when the contract has zero intrinsic value. This means that at expiration, the option contract will become completely worthless. At expiration, a call option is worthless if the call buyer can buy shares at a cheaper price in the open market than through the call contract. Likewise, put options are worthless at expiration if the put buyer can sell shares at a higher price in the open market than using the put contract.

Call options are OTM when the stock price is less than the strike price. Put options are OTM when the stock price is greater than the strike price.

Again, an option going OTM doesn’t necessarily mean losing money.

At-the-money (ATM)

An option contract is ATM when the strike price is equal to the stock price. This is the same whether it is a call option or put option.

Let’s look at two examples:

Long Call Option

long call option moneyness

This is an option P/L diagram of a long call option. The red dashed line represents the strike price of this option contract.

If you are unfamiliar with an option P/L diagram, you can learn how to read one here.

If the stock price is higher than the strike price (right side of the red dashed line), then the option is ITM.

If the stock price is lower than the strike price (left side of the red dashed line), then the option is OTM.

If the stock price is equal to the strike price (at the red dashed line), then the option is ATM.

Long Put Option

long put option moneynesslong put option moneyness

Moneyness categorization for a put option is the opposite of a call option. Again, the red dashed line represents the strike price of the put option.

If the stock price is higher than the strike price (area to the right of the red dashed line), then the put option is OTM.

If the stock price is lower than the strike price (area to the left of the red dashed line), then the put option is ITM.

If the stock price is equal to the strike price (at the red dashed line), then the put option is ATM.

It is important to note that although in these examples, ITM is equated to profit and OTM to loss, this is only true if you buy options. If you were selling options, ITM would equate to a loss, while OTM would equate to a profit.

Bottom Line

These terms are building blocks used by options traders every day to describe the relative positions of the strike price and stock price; understanding these three categories is essential to developing as an options trader.


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