In-the-Money, At-the-Money, Out-of-the-Money
With strike price and premium understood, you can now determine an option's moneyness: whether exercising it right now would be profitable.
The Three States of Moneyness
| Status | Call Option | Put Option |
|---|---|---|
| In-the-money (ITM) | Market price > strike price | Market price < strike price |
| At-the-money (ATM) | Market price = strike price | Market price = strike price |
| Out-of-the-money (OTM) | Market price < strike price | Market price > strike price |
Exam Tip: Gotchas
For CALLS, in-the-money means market price is above strike. For PUTS, it is the opposite: market price is below strike. "Call UP, Put DOWN."
Calls: "Call UP"
A call option is in-the-money when the market price is above the strike price.
- Stock at $55, strike at $50 → In-the-money by $5
- Stock at $50, strike at $50 → At-the-money
- Stock at $45, strike at $50 → Out-of-the-money by $5
Why? A call gives you the right to buy. If you can buy at $50 (strike) and the stock is at $55, you're buying below market, and that's profitable.
Exam Tip: Gotchas
Expect a scenario question that flips calls and puts in the same stem. Check the option type FIRST, then apply the direction rule.
Puts: "Put DOWN"
A put option is in-the-money when the market price is below the strike price.
- Stock at $45, strike at $50 → In-the-money by $5
- Stock at $50, strike at $50 → At-the-money
- Stock at $55, strike at $50 → Out-of-the-money by $5
Why? A put gives you the right to sell. If you can sell at $50 (strike) and the stock is at $45, you're selling above market, and that's profitable.
Exam Tip: Gotchas
A put is in-the-money only when the market price drops below the strike. If the stock is at or above the strike, the put has no intrinsic value.
Moneyness and Value
- Only in-the-money options have intrinsic value
- An out-of-the-money option has zero intrinsic value but may still have time value
- At expiration, only in-the-money options are exercised
- Out-of-the-money and at-the-money options expire worthless
| Moneyness | Has Intrinsic Value? | Has Time Value? | Exercised at Expiration? |
|---|---|---|---|
| In-the-money | Yes | Usually yes | Yes |
| At-the-money | No | Usually yes | No |
| Out-of-the-money | No | May have some | No |
Exam Tip: Gotchas
- For CALLS, in-the-money means market price is ABOVE the strike. For PUTS, it's the opposite: market price is BELOW the strike. "Call UP, Put DOWN."
- The exam often switches between calls and puts in the same question to test whether you can keep the directions straight.
- An option can have time value even when out-of-the-money. OTM options are not necessarily worthless before expiration.
- At-the-money options have zero intrinsic value. They are not "half in" or "borderline profitable."
Memory Aid: Call UP, Put DOWN. Calls are in-the-money when the market goes UP above the strike. Puts are in-the-money when the market goes DOWN below the strike.