Lesson 2 of 6 · 10 min

Moneyness: in, at and out of the money

Moneyness compares the underlying price with the exercise price; it tells you how likely exercise is and how strongly the option's price reacts to the underlying.

In short

A call is in the money (ITM) when $S_t > X$ , at the money (ATM) when $S_t = X$ , and out of the money (OTM) when $S_t < X$ .
A put is the mirror image: ITM when $S_t < X$ , ATM when $S_t = X$ , OTM when $S_t > X$ .
ITM options are more likely to be exercised; OTM options are less likely.
A deep-in-the-money option moves almost one-for-one with the underlying; a deep-out-of-the-money option barely moves.
Moneyness is a handy way to compare options on the same underlying with different exercise prices or maturities.

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