The moneyness of an option refers to the relation between the strike price of an option and the current price of the underlying asset. There are three related terms. The three terms are “in the money”, “out of the money”, and “at the money”. They’re often abbreviated as “ITM”, “OTM”, and “ATM”.
What does “in the money” (ITM) mean?
A call option is said to be “in the money” if the strike price is below the present price of the underlying asset. An owner of a call option would have the right to exercise their option to buy shares at the lower strike price and immediately sell at the higher current price. There is potential profit contained within the call option at this point and thus it is said to be “in the money”.
So for example, let’s say you own a call option on Apple stock with a strike price of $50 and currently the present market price of the underlying Apple stock is at $100. This means your call option is “in the money” because if you exercised it, you could buy 100 shares at the strike price of $50 and then sell them back on the market for $100. That’s a profit of $50 per share, basically.
As for a put option, the situation is reversed. A put option is considered to be “in the money” when the strike price is above the present market price of the underlying asset. As a result, an owner of the put option would be presented the opportunity to buy shares at the current market price and then to immediately exercise their put option to sell at the higher strike price. So, the put option holds the potential for profit.
The potential profit as defined above is also called the intrinsic value of an option. A more generalized way to define the term “in the money” that works for both call and put options is that an option will be “in the money” if it has intrinsic value.
What does “out of the money” (OTM) mean?
An option is considered to be “out of the money” when it possesses no intrinsic value. For a call option, this signifies that the strike price has risen up beyond the current market price. Conversely, for a put option, the strike price would be situated beneath the current market price.
What does “at the money” (ATM) mean?
Both call and put options are both considered to be “at the money” if the strike price is equal to the present price of the underlying asset. You can think of the option being right at the point of going either “in the money” or “out of the money”. It is at this point and so it is “at the money”.