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In The Money

In the money (ITM) options have strike prices below the current stock price for call options or above the current stock price for put options, giving them intrinsic value. Out of the money (OTM) options have strike prices above the current stock price for call options or below the current stock price for put options, so they have no intrinsic value. ITM options are more expensive than OTM options due to their intrinsic value. While ITM options have smaller percentage price movements, OTM options are preferable for traders with limited capital due to their lower costs and potential for larger gains.

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97 views2 pages

In The Money

In the money (ITM) options have strike prices below the current stock price for call options or above the current stock price for put options, giving them intrinsic value. Out of the money (OTM) options have strike prices above the current stock price for call options or below the current stock price for put options, so they have no intrinsic value. ITM options are more expensive than OTM options due to their intrinsic value. While ITM options have smaller percentage price movements, OTM options are preferable for traders with limited capital due to their lower costs and potential for larger gains.

Uploaded by

jimmy victoria
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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In the Money vs.

Out of the Money: What's the


Difference?
BY CHRISTINA MAJASKI

Updated Jun 25, 2019


In the Money vs. Out of the Money: An Overview
In options trading, the difference between "in the money" (ITM) and "out of the money" (OTM)
is a matter of the strike price's position relative to the market value of the underlying stock,
called its moneyness.

An ITM option is one with a strike price that has already been surpassed by the current stock
price. An OTM option is one that has a strike price that the underlying security has yet to
reach, meaning the option has no intrinsic value.

In the Money
ITM options also have their uses. For example, a trader may want to hedge or partially hedge
their position. They may also want to buy an option that has some intrinsic value, and not just
time value. Because ITM options have intrinsic value and are priced higher than OTM options
in the same chain, the price moves (%) are relatively smaller. That is not to say ITM option
won't have large price moves, they can and do, but, compared to OTM options, the
percentage moves are smaller.

Certain strategies call for ITM options, while others call for OTM options, and sometimes both.
One is not better than another; it just comes down to what works for the best for the strategy
in question.
A call option gives the option buyer the right to buy shares at the strike price if it is beneficial
to do so. An in the money call option, therefore, is one that has a strike price lower than the
current stock price. A call option with a strike price of $132.50, for example, would be
considered ITM if the underlying stock is valued at $135 per share because the strike price
has already been exceeded. A call option with a strike price above $135 would be considered
OTM because the stock has not yet reached this level.

In the case of the stock trading at $135, and the option strike of $132.50, the option would
have $2.50 worth of intrinsic value, but the option may cost $5 to buy. It costs $5 because
there is $2.50 of intrinsic value and the rest of the option cost, called the premium, is
composed of time value. You pay more for time value the further the option is from expiry
because the underlying stock price will move before expiry, which provides an opportunity to
the option buyer and risk to the option writer which they need to be compensated for.

Put options are purchased by traders who believe the stock price will go down. ITM put
options, therefore, are those that have strike prices above the current stock price. A put option
with a strike price of $75 is considered in the money if the underlying stock is valued at $72
because the stock price has already moved below the strike. That same put option would be
out of the money if the underlying stock is trading at $80.
In the money options carry a higher premium than out of the money options, because of the
time value issue discussed above.

Out of the Money


In the money or out of the money options both have their pros and cons. One is not better
than the other. Rather, the various strike prices in an options chain accommodate all types
of traders and option strategies.

When it comes to buying options that are ITM or OTM, the choice depends on your outlook
for the underlying security, financial situation, and what you are trying to achieve.

OTM options are less expensive than ITM options, which in turn makes them more desirable
to traders with little capital. Although, trading on a shoe-string budget is not advised. Some of
the uses for OTM options include buying the options if you expect a big move in the stock.
Since OTM options have a lower up-front cost (no intrinsic value) than ITM options, buying an
OTM option is a reasonable choice. If a stock currently trades at $100, you can buy an OTM
call option with a strike of $102.50 if they think the stock will reasonably rise well above
$102.50.

OTM options often experience larger percent gains/losses than ITM options. Since the OTM
options have a lower price, a small change in their price can translate into large percent
returns and volatility. For example, it is not uncommon to see the price of an OTM call
option bounce from $0.10 to $0.15 during a single trading day, which is equivalent to a 50
percent price change. The flip side is that these options can move against you very quickly as
well, though the risk is limited to the amount paid for the option (assuming you are the option
buyer and not the option writer).

KEY TAKEAWAYS

 In options trading, the difference between "in the money" and "out of the money" is a
matter of the strike price's position relative to the market value of the underlying stock,
called its moneyness.
 Because ITM options have intrinsic value and are priced higher than OTM options in
the same chain, the price moves (%) are relatively smaller.
 OTM options are less expensive than ITM options, which in turn makes them more
desirable to traders with little capital.

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