# Option Moneyness Definition

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 current 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”.

For example, let’s say you own a call option for Apple stock with a strike price of \$50 and the current market price of the underlying Apple stock is at \$100. This call option would be “in the money” because you have the right to exercise the call option to buy 100 shares of stock at the strike price of \$50 and sell back out to the market at \$100. This would provide you a profit of \$50 per share of stock.

As for a put option, the situation is reversed. A put option is said to be “in the money” if the strike price is above the current price of the underlying asset. As a result, an owner of a put option would have the right to buy shares at the current market price and then immediately exercise their put option to sell at the higher strike price. Again, there is potential profit contained within the put option.

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?

For a call option, this is when the strike price is above the current price while for a put option, this is when the strike price is below the current price.

In other words, an option will be “out of the money” if it contains no intrinsic value.

## What does “at the money” (ATM) mean?

Both call and put options are considered to be “at the money” if the strike price is equal to the current 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”.

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