In options trading, the terms in the money options and out of the money options describe whether an option currently has intrinsic value based on the relationship between the strike price and the market price of the underlying asset.
These concepts are part of what traders call option moneyness, which categorizes options depending on how profitable they would be if exercised immediately.
Understanding the difference between in the money options and out of the money options helps traders evaluate option pricing, risk, and the probability of profit.
What Does In the Money Mean?
An option is in the money (ITM) when exercising it would result in immediate profit based on the current market price.
For call options, this occurs when the stock price is higher than the strike price. For put options, this occurs when the stock price is lower than the strike price.
Examples:
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A call option with a $50 strike price is in the money if the stock trades at $60.
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A put option with a $50 strike price is in the money if the stock trades at $40.
In these situations, the option already has intrinsic value. Because of this, in-the-money options typically have higher prices than options that are not yet profitable.
What Does Out of the Money Mean?
An option is out of the money (OTM) when exercising it would not currently be profitable.
For call options, this happens when the stock price is below the strike price. For put options, this happens when the stock price is above the strike price.
Examples:
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A call option with a $50 strike price is out of the money if the stock trades at $45.
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A put option with a $50 strike price is out of the money if the stock trades at $55.
Out-of-the-money options have no intrinsic value, but they still carry time value because the underlying asset could move before expiration.
Many traders choose out-of-the-money options because they are cheaper, although they also carry higher risk of expiring worthless.
How Option Moneyness Affects Pricing
Option pricing is heavily influenced by the option’s moneyness. Options consist of two main components:
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Intrinsic value
In-the-money options contain both intrinsic value and time value. Out-of-the-money options contain only time value.
Because of this difference, in-the-money options usually have higher premiums.
Other factors such as implied volatility and time to expiration also influence pricing.
For example, even out-of-the-money options may become expensive if the market expects large price movements.
Probability of Profit Concepts
Option moneyness also influences the probability that an option will expire profitably.
In general:
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In-the-money options have a higher probability of expiring with value.
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Out-of-the-money options have a lower probability but may offer larger percentage returns.
Traders often evaluate probability using metrics such as:
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delta values
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historical volatility
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implied volatility
Because of these factors, choosing the right strike price depends on a trader’s strategy, risk tolerance, and market outlook.
Example Option Pricing Scenarios
Consider a stock trading at $100.
Three call options may exist with different strike prices:
| Strike Price | Option Type | Moneyness |
|---|---|---|
| $90 | In the Money | Already profitable |
| $100 | At the Money | Near the current price |
| $110 | Out of the Money | Needs price increase to profit |
The $90 strike call has intrinsic value because the stock price is higher.
The $100 strike call has mostly time value.
The $110 strike call has only time value and requires the stock to rise above the strike price before expiration.
These differences explain why option premiums vary across strike prices.
Conclusion
In-the-money and out-of-the-money options describe whether an option currently has intrinsic value relative to the underlying asset price. In-the-money options already contain intrinsic value, while out-of-the-money options rely on future price movements to become profitable.
Understanding option moneyness helps traders evaluate option pricing, probability of profit, and risk when selecting options strategies.
FAQ
What does in the money mean in options?
An option is in the money when exercising it would produce immediate profit based on the current stock price.
What does out of the money mean in options?
An option is out of the money when exercising it would not currently produce profit.
Are out-of-the-money options risky?
Yes. They are cheaper but have a higher chance of expiring worthless.
References
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Investopedia, In the Money vs. Out of the Money: What's the Difference?, 2026.
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Options Samurai, Option Moneyness, 2026.
