In the Money vs. Out of the Money Options Explained
An option is “in the money” when it would be worth exercising right now, and “out of the money” when it would not. In simple terms, it comes down to comparing the stock’s current price to the option’s strike price (the set price at which you can buy or sell the stock).
These two terms show up constantly once you start reading an options chain or watching options prices move. They tell you at a glance whether a contract has real, immediate value or is purely a bet on future price movement. Let’s break down exactly how to tell the difference, using plain numbers instead of formulas.
What Does “In the Money” Mean?
In the money (often shortened to ITM) means the option has intrinsic value, meaning it would produce a profit if exercised immediately, before even counting the premium you paid.
- A call option (the right to buy a stock) is in the money when the stock price is above the strike price.
- A put option (the right to sell a stock) is in the money when the stock price is below the strike price.
For example, if you hold a call option with a $50 strike price and the stock is trading at $55, that option is in the money by $5. You could, in theory, exercise it and buy the stock for $50, then immediately sell it at the $55 market price.
What Does “Out of the Money” Mean?
Out of the money (OTM) means the option has no intrinsic value. Exercising it right now would not make sense because you could get a better price simply by buying or selling the stock on the open market.
- A call option is out of the money when the stock price is below the strike price.
- A put option is out of the money when the stock price is above the strike price.
Using the same example, if the stock is trading at $45 and your call option has a $50 strike price, that option is out of the money. Nobody would pay $50 for a stock they could buy for $45 in the open market.
What Is “At the Money”?
There is a third category worth knowing: at the money (ATM). This is when the stock price and the strike price are equal, or very close to it. An at-the-money option has no intrinsic value yet, but it usually has the highest amount of time value (the part of an option’s price based on how much time is left until expiration) relative to similar contracts.
ITM vs. OTM vs. ATM: Quick Comparison
| Status | Call Option Condition | Put Option Condition | Has Intrinsic Value? |
|---|---|---|---|
| In the money (ITM) | Stock price > strike price | Stock price < strike price | Yes |
| At the money (ATM) | Stock price ≈ strike price | Stock price ≈ strike price | No (or minimal) |
| Out of the money (OTM) | Stock price < strike price | Stock price > strike price | No |
How Does This Affect an Option’s Price?
An option’s total price, called the premium, is made up of two parts: intrinsic value and time value.
- Intrinsic value is the “in the money” amount, if any. Out-of-the-money options always have zero intrinsic value.
- Time value is the extra amount traders pay for the chance the option could move further in the money before expiration.
This is why an out-of-the-money option still costs money even though it has no intrinsic value. You are paying purely for time and the possibility the stock will move in your favor.
Why Does ITM vs. OTM Matter for Traders?
In practice, most beginner traders lean toward one of two strategies, and knowing the difference between ITM and OTM helps explain why.
- Buying out-of-the-money options is generally cheaper and offers higher potential percentage returns, but the stock has to move further for the trade to pay off, so more of these contracts expire worthless.
- Buying in-the-money options costs more upfront but behaves more like owning the stock itself, since a larger share of the price is already “real” value instead of a bet on the future.
Sellers of options think about this differently. A trader who sells an out-of-the-money option is often betting that the stock will not move enough to make the contract valuable, collecting the premium as the option loses value over time.
A Simple Way to Remember It
Ask yourself: “If I exercised this option right now, would I make money before fees?” If yes, it is in the money. If no, it is out of the money. If it is roughly break-even, it is at the money.
Options trading carries real financial risk, including the possibility of losing the entire premium paid on an out-of-the-money option that expires worthless. This article is for general education and should not be treated as financial advice.
Key Takeaways
- In the money means an option has intrinsic value and would be profitable to exercise right now.
- Out of the money means an option has no intrinsic value; its price is based purely on time value.
- At the money is the midpoint, where the stock price and strike price are roughly equal.
- Call options move in the money as the stock price rises above the strike; put options move in the money as the stock price falls below the strike.
- ITM options generally cost more but carry less risk of expiring worthless compared to OTM options.
Frequently Asked Questions
Can an out-of-the-money option still make money?
Yes. If the stock moves in the right direction before expiration, an out-of-the-money option can become in the money or simply increase in price due to rising time value, allowing a trader to sell it for a profit even without exercising it.
Is it better to buy in-the-money or out-of-the-money options as a beginner?
Many new traders start with in-the-money or at-the-money options because they behave more predictably and have a higher chance of holding value, though they cost more upfront. Out-of-the-money options are cheaper but riskier, since they need a bigger price move to pay off.
How do I know if my option is ITM or OTM right now?
Compare the current stock price to your option’s strike price. Most brokerage platforms also label this directly on the options chain, often showing ITM contracts highlighted or shaded differently from OTM contracts.
Does an option lose all its value if it’s out of the money at expiration?
Yes. If an option is out of the money at expiration, it expires worthless, and the buyer loses the full premium that was paid for it.
What’s the difference between intrinsic value and time value?
Intrinsic value is the amount an option is in the money by; time value is the extra amount priced in based on how much time remains until expiration and how volatile the stock is. Out-of-the-money options have time value only, with zero intrinsic value.
