Moneyness

Moneyness describes where an option's strike price sits compared with the stock's current price. It uses three labels: in the money (ITM), at the money (ATM) and out of the money (OTM).

It is a quick way to say whether an option has intrinsic value right now. An ITM option does. An ATM or OTM option does not, so all of its price is time value.

For a call, compare the stock price to the strike. The call is ITM when the stock is above the strike, ATM when they are about equal, and OTM when the stock is below the strike. A put is the mirror image: ITM when the stock is below the strike, and OTM when it is above.

Say a stock trades at $50. A $45 call is ITM, a $50 call is ATM and a $55 call is OTM. For puts, a $55 put is ITM, a $50 put is ATM and a $45 put is OTM. A stock rarely sits exactly on a strike, so the strike closest to the price is usually called the at-the-money strike.

Traders also describe distance. A "deep ITM" option is well past its strike, and a "far OTM" option has a strike well away from the price. One simple measure is the gap between strike and stock price as a percentage: a $55 call on a $50 stock is 10% OTM.

Delta gives a rough second view. An ATM call has a delta near 0.50, a deep ITM call has a delta close to 1, and a far OTM call has a delta close to 0. Delta is sometimes used as a loose guide to the chance an option finishes in the money, but it is an estimate, not a promise.

Price: an ITM option costs intrinsic value plus time value, while an OTM option costs time value only. That is why OTM options are cheaper and also why they are more likely to expire worthless.

Time decay: time value is largest for ATM options, so they tend to lose the most from the passing of time. Deep ITM and far OTM options carry less time value to lose.

Risk for sellers: if you sell an OTM option, the stock has to move to reach your strike before you are at risk of assignment. If you sell an ITM option, you are already past it, so assignment is more likely.

An option's label is not fixed. A $55 call is OTM while the stock is at $50, but it becomes ITM if the stock rises to $58. So always judge moneyness against the current price, and remember that only the position at expiration decides whether the option has value left.