What is moneyness in options?
In one line: Moneyness describes where the stock price sits compared with an option's strike: in the money, at the money or out of the money.
How it works
Moneyness is one word for one question: where is the stock compared with the Strike price? There are three answers.
- In the money (ITM): the option has value if used now. A call is ITM when the stock is above the strike. A put is ITM when the stock is below it.
- At the money (ATM): the stock sits at, or very near, the strike.
- Out of the money (OTM): the option has no value if used now. A call is OTM when the stock is below the strike. A put is OTM when the stock is above it.
Calls and puts flip. A $55 strike is in the money for a put on a $50 stock, but out of the money for a call.
Moneyness changes every time the stock moves. An option you sold OTM can be ITM by Friday.
An example (hypothetical)
XYZ trades at $50 (an illustration, not a trade idea). Here are three puts you could sell, one in each state. The premiums are made up. The last column shows each one if XYZ ends at $44 and you're assigned.
| Put you sell | Moneyness today | Premium | Intrinsic value now | If XYZ ends at $44 |
|---|---|---|---|---|
| $55 strike | In the money | $5.60 | $5.00 | −$1,100 + $560 = −$540 |
| $50 strike | At the money | $2.00 | $0 | −$600 + $200 = −$400 |
| $45 strike | Out of the money | $0.60 | $0 | −$100 + $60 = −$40 |
The ITM put pays the most, but most of that is intrinsic value: money that only covers the stock being below the strike already. The OTM put pays little, but gives you room before you're hurt.
Why it matters for sellers
Moneyness is a quick read on two things: how likely Assignment is, and how much of the premium is real pay.
- OTM: all of the premium is time value. Less chance of assignment. Smaller premium.
- ATM: the most time value, about even odds of ending ITM.
- ITM: a big premium, mostly intrinsic. Assignment is likely, and can come early.
Most sellers in the wheel strategy start OTM: a put below the price, a call above the price they paid. Our OTM vs ITM cash-secured puts page compares the two in more detail.
Questions
Is "at the money" exact?
Not really. A stock is rarely exactly on the strike. Most people call the strike nearest the stock price "at the money."
Can an option go from out of the money to in the money?
Yes, any time the stock crosses the strike. That's why a seller watches the stock, not just the clock.
What does "deep in the money" mean?
The stock is far past the strike. The option is nearly all intrinsic value and moves almost dollar for dollar with the stock.
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