Lesson 5 of 20 · 5 min

Moneyness: in, at, and out of the money

Moneyness is where the strike sits relative to the price, and it changes how the contract behaves.

Moneyness is a single word for the relationship between the strike and the current underlying price. It has three states, and the vocabulary is worth being precise about because the three states behave differently in every respect.

The three states, defined for each instrument:

In the money: the contract has intrinsic value. For a call, the price is above the strike; for a put, below it.
At the money: the strike is at or very near the current price. Maximum extrinsic value sits here.
Out of the money: the contract has no intrinsic value. For a call, the price is below the strike; for a put, above it.

Three behavioural consequences follow. Deep in the money contracts move nearly one-for-one with the underlying and hold little extrinsic value, so they behave like a leveraged version of the shares themselves. At the money contracts carry the most extrinsic value in absolute terms and lose it fastest as expiry approaches. Far out of the money contracts are cheap, have low probability of finishing with value, and are the most sensitive in percentage terms to changes in volatility.

A common misreading: out of the money does not mean worthless. It means no intrinsic value. A far-dated out of the money contract can carry substantial premium, all of it extrinsic. Equally, in the money does not mean profitable — whether a position made money depends on the premium paid, which moneyness says nothing about.

Key terms

Moneyness: The relationship between strike and current underlying price. In, at, or out of the money.
In the money (ITM): The contract has positive intrinsic value. Its premium has a floor it cannot fall below before expiry.
Out of the money (OTM): The contract has zero intrinsic value. Its entire premium is extrinsic and decays to nothing if the price does not move.
At the money (ATM): Strike approximately equal to the current price. Carries the largest extrinsic value of any strike.

Worked example

Classifying one chain at once

Underlying at $50.

$45 call: In the money
$50 call: At the money
$55 call: Out of the money
$45 put: Out of the money
$55 put: In the money

The same $45 strike is in the money as a call and out of the money as a put. Moneyness is a statement about a contract, not about a strike.

Check yourself

The stock is at $50. Is the $55 put in or out of the money, and does that tell you whether its holder is profitable?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.