What Do In-the-Money and Out-of-the-Money Mean?

In-the-money (ITM) and out-of-the-money (OTM) are terms used to describe the value of an option. Simply put, they indicate whether exercising the option would be profitable.

  1. In-the-Money Options

Call Options: When you buy a call option (giving you the right to buy an asset at a fixed price), if the current market price is higher than the strike price, you can buy the asset at the lower strike price and sell it at the higher market price to make a profit. In this case, the option is considered “in-the-money.”

  • Example: You have a call option with a strike price of $50, and the market price is currently $60. You can buy the asset at $50 and sell it at $60, making a profit of $10.

Put Options: When you buy a put option (giving you the right to sell an asset at a fixed price), if the current market price is lower than the strike price, you can sell the asset at the higher strike price and buy it back at the lower market price to make a profit. In this case, the option is in-the-money.

  • Example: You have a put option with a strike price of $50, and the market price is currently $40. You can sell the asset at $50 and buy it back at $40, making a profit of $10.
  1. Out-of-the-Money Options

Call Options: When you buy a call option, if the current market price is lower than the strike price, it’s not beneficial to exercise the option because it’s cheaper to buy the asset directly in the market. This type of option is considered out-of-the-money.

  • Example: You have a call option with a strike price of $50, and the market price is currently $40. You wouldn’t exercise the option because it’s cheaper to buy the asset in the market for $40.

Put Options: When you buy a put option, if the current market price is higher than the strike price, it’s not beneficial to exercise the option because you could sell the asset for more in the market. This type of option is “out-of-the-money.”

  • Example: You have a put option with a strike price of $50, and the market price is currently $60. You wouldn’t exercise the option because you could sell the asset in the market for $60.
  1. At-the-Money Options

Call and Put Options: When the strike price of the option is roughly equal to the current market price, the option is at-the-money. In this case, exercising the option provides no real advantage.

  • Example: You have an option with a strike price of $50, and the market price is also $50. There’s no significant benefit to buying or selling the asset since the prices are the same.

In Summary:

In-the-Money: The option is beneficial and exercising it results in profit.

Out-of-the-Money: The option isn’t beneficial, and exercising it would be a disadvantage.

At-the-Money: There’s no significant advantage or disadvantage to exercising the option.