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In the money vs out of the money: cushion or premium, which do you want?

An out-of-the-money option gives the seller room: the stock can move some way before the strike matters. An in-the-money option gives a bigger premium, but most of it is value the seller already owes. For a seller it's a choice between cushion and cash up front.

Comparison · 6-minute read · Updated 2026-10-26

The short answer

Out of the money (OTM) means the strike hasn't been reached. A put below the stock price, or a call above it. The option's price is all extrinsic value, and there's a gap, the cushion, before assignment is likely.

In the money (ITM) means the strike has been passed. A put above the stock price, or a call below it. The price is big, but most of it is intrinsic value the seller would pay back on assignment.

Sellers who want to keep the premium and avoid assignment sell OTM. Sellers who want a bigger cushion on a covered call, or who want to be assigned, sometimes sell ITM. See Moneyness.

Side by side

The same put, two strikes

A made-up stock, XYZ, trades at $50. Compare two 30-day puts (an illustration, not a trade idea):

• OTM: the $45 put for $1.00. Cushion of $5. All extrinsic.
• ITM: the $55 put for $5.80. No cushion; $5.00 is intrinsic, $0.80 is extrinsic.

The ITM put collects $580. It sounds like six times the premium. But $500 of it is a debt the moment you sell: the buyer can hand you shares at $55 that are worth $50 today. The seller's real pay is the $0.80.

A worked example, every outcome

The ITM put only beats the OTM one if XYZ rises past $55. If the stock does nothing, the ITM seller nets $80 against $100. If the stock falls, the ITM seller loses $520 more, because the cushion was never there.

Below $45, the ITM seller is always $520 behind: $10 more strike to pay, less $4.80 more premium collected. Above $55, the ITM seller is $480 ahead. In between, it depends on where the stock lands.

When a seller picks in the money on purpose

Mostly on covered calls, after a stock has dropped. Say you own XYZ at $50 and it falls to $44. Selling the $42 call, which is in the money, collects a large premium that cushions more of the drop. The cost: if XYZ recovers, your shares are called away at $42, below what you paid, and the loss is locked in.

That trade is sometimes right and often a trap. Our guide to the covered call shows the strike-below-cost problem in full.

A cash-secured put sold in the money is rarer. It's a way to say "I want these shares now, and I'll take a small discount for the wait." If that's really the goal, a limit order is simpler.

What the cushion is worth

The OTM seller's $5 cushion is the whole reason most months end quietly. In the wheel strategy, that cushion is set with delta: a put around 0.20 to 0.30 delta sits far enough out that the stock has to fall a meaningful amount before assignment, yet close enough that the premium is worth the cash set aside.

Go further out of the money and the cushion grows while the premium shrinks toward pennies. Go in the money and the premium grows while the cushion goes negative. There's no strike that gives both.

What to do with this

1. On any chain, find the current stock price and mark which puts and calls are OTM and which are ITM.
2. For one ITM option, split the price into intrinsic and extrinsic. Notice how little a seller is actually paid.
3. Decide what you want first: to keep the premium and avoid shares, or to end up with shares. OTM for the first, and a limit order may beat ITM for the second. The cash-secured put guide compares the two.

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