In-the-money and out-of-the-money describe an option’s current moneyness: the relationship between its underlying asset’s market price and its strike price. An in-the-money (ITM) option has positive intrinsic value, while an out-of-the-money (OTM) option has none. Neither label establishes whether buying or holding the option is profitable.
How Moneyness Is Determined
The strike is the contractual price at which a call gives its holder the right to buy, or a put gives its holder the right to sell, the underlying asset. These classifications apply to options on currencies and other underlying assets, not just stocks.
A call is ITM when the underlying price is above the strike and OTM when it is below the strike. A put uses the opposite relationship: it is ITM below the strike and OTM above it. At exact equality, either option is at the money (ATM), with zero intrinsic value.
For both in-the-money and out-of-the-money options, the classification can change as the underlying price moves relative to the strike.
Intrinsic and Extrinsic Value
Intrinsic value is the nonnegative exercise payoff calculated from the current underlying price, before deducting premiums or costs. Per underlying unit, call intrinsic value = max(underlying price − strike, 0), while put intrinsic value = max(strike − underlying price, 0). The zero floor means unfavorable exercise terms produce no intrinsic value, rather than a negative amount.
In a hypothetical example, a call with a $50 strike has $5 of intrinsic value when the underlying trades at $55, increasing to $10 if it rises to $60. A put with the same strike has $5 of intrinsic value at $45, increasing to $10 if the underlying falls to $40. These amounts are per underlying unit, not necessarily per option contract.
Extrinsic value is the option premium remaining after intrinsic value is deducted. In-the-money and out-of-the-money options can both have extrinsic value before expiration, so an OTM option can still have a market price. Time remaining and implied volatility influence this value; more time and higher implied volatility generally support higher premiums, other things equal.
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Get startedComparing ITM and OTM Options
Comparing in-the-money and out-of-the-money options requires otherwise comparable contracts, including the same option type, underlying asset and expiration.
- Purchase Cost: ITM options generally require a larger premium, while OTM options generally cost less. A lower premium does not make an option safer or guarantee a better return.
- Exercise Terms: An ITM option currently offers favorable exercise terms relative to the underlying market price. An OTM option needs a favorable underlying-price move to finish ITM.
- Expiration Risk: An option that finishes OTM has no expiration payoff, so a buyer holding it to expiration loses the entire premium paid. An option that is ITM today can also later expire worthless.
Moneyness Is Not Profitability
A positive intrinsic payoff is not the same as net profit: the premium and transaction costs must also be recovered. Suppose the hypothetical $50-strike call costs an $8 premium and the underlying finishes at $55. Its $5 expiration payoff leaves the buyer with a $3 loss per underlying unit before costs, despite finishing ITM.
Favorable exercise terms also do not mean exercising is preferable to selling the option. Selling may preserve remaining extrinsic value that exercise would forfeit. Whether and when exercise is available depends on the contract’s terms. Moneyness alone is therefore neither a complete measure of risk nor an instruction to exercise.
