In the Money vs. Out of the Money: An Overview

Traders define options as "in the money" (ITM) or "out of the money" (OTM) by the strike price's position relative to the mar♚ket value of the underlying🦂 stock, commonly called its moneyness.

An ITM option is one with a strike price that has already been surpassed by the current stock price. An OTM option has a strike price that the underlying security has yet to reach, meaning the option has no 澳洲幸运5官方开奖结果体彩网:intrinsic value.

In the Money

ITM options have their uses. For example, a trader may want to hedge or partially hedge their position. They may also want to buy an option that has some intrinsic value rather than just time val🌼ue.

Becauꦰse ITM options have intrinsic value and are priced higher than OTM options in the same chain, the price moves (%) are relatively smaller. It is possible for ITM options to have large price moves but, compared to OTM options, the percentage moves are smaller.

Calls

A call option gives the option buyer the right to buy shares at the strike price when and if it is beneficial to do so. An in the money call option, therefore, is one that has a strike price lower than the current stock price.

For example, a call option with a strike price of $132.50 would be considered ITM if the underlying stock is valued at $135 per share because the strike price has already been exceeded. A call option with a strike price above $135 would be൩ considered OTM because the stock has not yet reached this level.🅠

In this case, the option would have $2.50 worth of intrinsic value, but the option may cost $5 to buy. It costs $5 because there is $2.50✅ of intrinsic value and the rest of the option cost, called the premium, is composed of time value. You pay𒁏 more for time value the further the option is from expiry because of the greater probability the underlying stock price will move before expiry, which provides an opportunity to the option buyer and risk to the option writer which they need to be compensated for.

Puts

澳洲幸运5官方开奖结果体彩网:Put options are purchased by traders who believe the stock price will g✱o dow🐎n.

ITM put options, therefore, are those that have strike prices above the current stock price. A put option with a strike price of $75 is considered in the 🌟money if the underlying stock is valued at $72 because the stock price has already moved below the strike. That same put option would be out of the money if the underlying stock is trading at $80.

Generally, the price of a 🌸put option increases the farther away from expiry it is, because of the time value.

Out of the Money

In the money or out of the money options each have their pros and cons. One is not better than the other. Rather, the various strike prices in an options chain accommodate all types of traders a🌳nd option strategies.

When it comes to buying options that are ITM or OTMꦬ, the choice depends on your outlook for the underlying ꦜsecurity, financial situation, and what you are trying to achieve. 

OTM options are less expensive than ITM options, which in tu♚rn makes them more desirable to traders with limited capital.

Some of the uses for OTM options include buying 💫the options if you expect a big move in the stock. Since OTM൩ options have no instrinsic value, they have a lower up-front cost than ITM options. If a stock currently trades at $100, you can buy an OTM call option with a strike of $102.50 if you think the stock can reasonably rise well above $102.50.

OTM options often experience larger percent gains/losses than ITM options. Since the OTM options have a lower price, a small change in their price can translate into large percent returns and 澳洲幸运5官方开奖结果体彩网:volatility.

It is not uncommon to s𓆉ee the price of an OTM call option bounce from $0.1♑0 to $0.15 during a single trading day, which is equivalent to a 50 percent price change.

The Bottom Line

In the money options have an intrinsic value. That is, the strike price that is agreed upon has already been surpassed by the cur🔥rent market price of t✃he asset.

An out of money option has a strike price that the underlying security has yet to reach. That makes this type of optio🌺n cheaper to obtain but riskier as an investment.