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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Moneyness in options refers to the relationship between an option’s strike price and the current price of the underlying asset.

Options are either in-the-money (ITM), out-of-the-money (OTM), at-the-money (ATM), or near-the-money. You can also have options that are deep-in-the-money or far-out-of-the-money.

Generally, a call option is in-the-money when the strike price is below the underlying asset price while a put is ITM when the strike price is above the underlying asset price.

You flip the relationship for out-of-the-money options: an OTM call’s strike price is above the underlying stock price while an OTM put’s strike price is below the stock price.

What Is Moneyness?

The moneyness of an option describes the relationship between the strike price of an options contract and the price of the underlying shares. The strike price is the price at which an investor can buy or sell a derivative contract.

Option moneyness may change as the underlying stock price fluctuates. A call option that is out-of-the-money one day could become in-the-money if the stock price rises.

Moneyness may also change throughout the trading day depending on price fluctuations in the underlying stock.
Moneyness of options plays a role in constructing options trading techniques, such as going long or short options, purchasing puts or calls, and executing more sophisticated options strategies.

Recommended: How to Trade Stock Options

How Does Moneyness Work?

Understanding the moneyness of an option is important for different core options trading strategies. As explained earlier, moneyness works by comparing the strike price of an option to the market price of the underlying shares.

Because options are complex, it’s also important to know options terminology.

•   An in-the-money (ITM) option has intrinsic value and time value.

•   An out-of-the-money (OTM) option only has time value, and thus is worthless if exercised.

•   OTM options have zero intrinsic value and thus are cheaper than in-the-money options.

•   At-the-money (ATM) options are rare since it might only occur for a moment when the stock price equals a specific strike price — near-the-money options are more common.

•   A near-the-money option has a strike closest to the underlying share price on an options chain.

Traders who are bullish on a stock may consider purchasing call options that are out-of-the-money, as these could experience significant percentage gains if the stock price rises sharply. They also drop the most if the price moves against the position.

In-the-money options may be more effective for traders anticipating moderate price movements. Due to leverage, ITM options can result in greater potential returns or losses compared to directly purchasing the underlying stock.

The deeper in-the-money an option is, the greater the sensitivity it will have to movements in the underlying shares.

Understanding Intrinsic and Time Value of Options

What’s the difference between intrinsic value and time value? It’s important to understand how these two factors play into the value of options.

The intrinsic value of an in-the-money call option is calculated as the difference between the stock’s market price and the option’s strike price. The intrinsic value of an in-the money put is the strike price of the option less the price of buying the stock.

The difference between the intrinsic value and the actual current price of the option is time value. Options that are in the money always have intrinsic value. Out-of-the-money options have no intrinsic value, but they might have time value.

Time value is influenced by multiple factors, including volatility and time until expiration. Learning about the option Greeks can help traders inform their strategies.

Types of Moneyness

An option can be categorized in four common ways with respect to the relationship with its strike price and underlying share price: in-the-money, out-of-the-money, at-the-money, and near-the-money. Understanding the differences between in-the-money vs. out-of-the-money options is essential for pricing and risk.

In-the-Money (ITM)

In-the-money options have intrinsic value, and may also retain some time value depending on time expiration and implied volatility. For a call option, that means the underlying stock price is above the option’s strike price. A put option is in-the-money when the stock price is below the strike price.

If a call option is in-the-money, the contract holder can exercise the option, receive shares at the strike price, then immediately sell the shares in the market. In-the-money puts allow the option holder to sell a stock at a higher price compared to the market price of the security. Long calls are usually used to place bullish bets on a stock while long puts are generally used when a trader is bearish.

In-the-money options, while having intrinsic value, also have a degree of time value. It is often advantageous for an options trader to exit the trade in the market rather than exercising immediately.

Options that can be exercised at any time before expiration are known as American Style options. Options that can only be exercised upon expiration are European Style. There are other differences between American and European options but the different exercise options are most relevant to this discussion.

Out-of-the-Money (OTM)

An out-of-the-money call option is one in which the strike price is above the underlying stock price. The owner of a call option anticipates that the share price may rise prior to expiration, potentially giving the option intrinsic value.

The seller of a call option benefits when the underlying stock price remains below the exercise price so they can keep the premium they collected when they sold to open the call.

Puts are out-of-the-money when the strike price is below the market price of the underlying shares. The owner of puts is bearish on the stock, so they want the stock to fall below the strike price, so that the puts become in-the-money.

Put sellers, who are neutral to bullish on the stock, hope the share price stays above the exercise price.

Out-of-the-money options do not have intrinsic value. Their premium is made up of time value only. Out-of-the-money options generally have lower premiums compared to in-the-money and at-the-money options, as they have a higher probability of expiring worthless.

At-the-Money (ATM)

At-the-money options have strike prices that match the market price of the underlying stock. These options, like out-of-the-money options, have no intrinsic value. At-the-money options typically cost more than out-of-the-money options, but less than in-the-money options.

This type of option moneyness means that calls and puts are heavily influenced by volatility and time decay of the option.

Near-the-Money

Near-the-money options have strike prices that are very close to the market price of the underlying stock, so they are just slightly in-the-money or out-of-the-money.

Near-the-money options are much more common than at-the-money options since the stock price is rarely precisely at a specific strike price. Near-the-money strikes are used when a trader wants exposure to an at-the-money option that is not available in the market.

Other Moneyness Terms

Other terms for moneyness include deep-in-the-money and far-out-of-the-money. These terms have no real qualitative difference between in-the-money and out-of-the-money, but are simply intensifiers. They are, however, in fairly common usage.

What Moneyness Means to Investors

Option moneyness tells a trader important information. The trader can use the moneyness of an option to help construct a trading thesis.

For example, if a trader expects a stock price to decline significantly in a short time frame, they may consider purchasing an out-of-the-money put option, as its value could increase if the stock price drops sharply.

Moneyness becomes increasingly important in complex options strategies, as multiple option legs can have different moneyness levels. Understanding this relationship is key to managing risk and exposure.

Still, an option holder might exit an option by selling or covering in the market rather than exercising early so that they can capture the time value of an option in addition to any intrinsic value.

The Takeaway

Moneyness describes the relationship between an option’s strike price and the price of the underlying stock. It can help options traders gauge the amount of intrinsic value an option has and inform simple and complex options strategies.

Beyond its role in pricing, moneyness also influences an option’s risk profile and profit potential. Understanding how options move between in-the-money, at-the-money, and out-of-the-money can help traders develop strategies that align with their market outlook and risk tolerance.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

How is moneyness calculated?

For a call option, moneyness is calculated by taking the underlying asset’s price and subtracting the option’s strike price. If that is a positive value, the call option is in-the-money. If it is a negative value, the call is out-of-the-money. The moneyness definition describes an option’s strike price relative to its underlying stock’s market price. A call option is in-the-money when the underlying asset price exceeds the strike price for a call to be in-the-money.

For a put option, the opposite is true: Moneyness is calculated by taking the underlying asset’s price and subtracting the option’s strike price. If that is a positive value, the put option is out-of-the-money. If it is a negative value, the put is in-the-money. The underlying asset price has to be below the strike price for a put to be in-the-money.

An at-the-money option is simple when the stock price and strike price are the same. Near-the-money options have strikes very close to the share price.

How are moneyness and delta different?

Option moneyness refers to the relationship between a strike price and the price of the underlying asset. Delta, on the other hand, tells a trader how sensitive an option is to changes in the underlying stock.

How are moneyness and implied volatility related?

Implied volatility tends to be lowest with at-the-money options. It increases when the option moves further out-of-the-money or further in-the-money. The “volatility smile” illustrates how implied volatility varies with an option’s moneyness.

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