ITM, ATM, and OTM Options Explained
Understanding "moneyness" is essential for choosing the right options contract.
Quick Summary
Moneyness describes the relationship between the stock price and the strike price. ITM options have intrinsic value. ATM options sit right at the current price. OTM options need the stock to move to become valuable. This single concept affects cost, risk, and probability of profit.
ITM
In The Money
Has intrinsic value. Higher cost, lower risk.
ATM
At The Money
Strike ≈ Stock price. Balanced risk/reward.
OTM
Out of The Money
No intrinsic value. Cheapest, highest risk.
An option is ITM when exercising it would be profitable (ignoring the premium paid):
Characteristics:
- Higher premium (you're paying for built-in value)
- Delta closer to 1.0 (moves nearly dollar-for-dollar with stock)
- Lower risk, lower percentage returns
- Less affected by time decay
An option is ATM when the strike price equals (or nearly equals) the current stock price.
Characteristics:
- Highest time value of any strike
- Delta around 0.50 (50% chance of finishing ITM)
- Most liquid—tightest bid/ask spreads
- Highest gamma (delta changes fastest near ATM)
An option is OTM when exercising it would not be profitable:
OTM Put: Stock Price > Strike Price
Characteristics:
- Cheapest premiums (only time value, no intrinsic)
- Most expire worthless (100% loss of premium)
- Maximum leverage when they work
- Highest time decay impact
Visual Comparison (Stock at $100)
See how moneyness flips for calls vs puts at the same strike:
| Strike | Call Status | Put Status |
|---|---|---|
| $90 | ITM (+$10) | OTM |
| $95 | ITM (+$5) | OTM |
| $100 | ATM | ATM |
| $105 | OTM | ITM (+$5) |
| $110 | OTM | ITM (+$10) |
Which Should You Use?
Use ITM When:
- • You want lower risk
- • Stock replacement strategy
- • You're conservative
- • Longer time horizon
Use ATM When:
- • Balanced risk/reward
- • Spread strategies
- • Need liquidity
- • Directional conviction
Use OTM When:
- • Speculative plays
- • Small capital
- • Cheap hedging
- • High-risk/high-reward
Common Mistakes
- Buying only OTM for low price: They're cheap because most expire worthless
- Confusing calls vs puts: ITM for calls is OTM for puts at the same strike
- Ignoring time decay: ATM/OTM options lose value faster as expiration nears
Frequently Asked Questions
Summary
Moneyness is one of the most important concepts in options trading—it determines cost, risk, and probability.
- ITM: Has intrinsic value, higher cost, moves more with stock
- ATM: Strike equals stock price, highest time value, most liquid
- OTM: No intrinsic value, cheapest, most expire worthless
- Calls vs Puts: Moneyness is opposite—ITM call = OTM put at same strike
