Moneyness describes where the strike price sits compared with the current price of the underlying. It tells you how much intrinsic value an option has, and it shapes how the option reacts to price moves and time.
The three states
- In the money (ITM): a call with strike below the market price, or a put with strike above it. It has intrinsic value.
- At the money (ATM): strike roughly equal to the market price. It is almost all time value.
- Out of the money (OTM): a call with strike above the market, or a put with strike below it. It has no intrinsic value.
Why it matters
ITM options move more like the stock itself, with delta closer to 1 (or -1 for puts), and cost more. OTM options are cheap but need a large move to pay off, and most of them expire worthless. ATM options have the most time value and the fastest time decay near expiry.
A practical rule of thumb
If you want an option that behaves like the stock with less capital, look at slightly ITM strikes. If you want a low-cost bet on a big move and accept that it will often lose, look at OTM strikes. Do not choose a strike only because it is cheap.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.