In-the-money (ITM) and out-of-the-money (OTM) are terms that describe an option's "moneyness": whether it would be worth exercising at the current market price of the underlying asset. A call option, which gives the right to buy, is in the money when the market price is above its strike price. A put option, which gives the right to sell, is in the money when the market price is below its strike. When exercising would bring no benefit, the option is out of the money, and when the market price equals or is very close to the strike, it is said to be at the money (ATM).
The terms apply to options on shares, indexes, currencies, commodities and cryptocurrencies, and to employee share options. They describe the present relationship between two prices, not whether buying the option was a good trade, since the price paid for the option, its premium, also matters. Moneyness affects an option's price, its sensitivity to market moves and how likely it is to be exercised at expiry.
In-the-money and out-of-the-money in plain terms
Imagine holding a voucher that lets you buy a concert ticket for 50 dollars. If tickets are selling for 80 dollars, the voucher is in the money: using it saves you 30 dollars. If tickets are selling for 40 dollars, it is out of the money, because you would be better off buying at the box office and ignoring the voucher.
A put works the other way round, like a guarantee that someone will buy your ticket from you for 50 dollars. That guarantee is valuable, or in the money, only if the market price drops below 50. Whether a voucher is in or out of the money can change daily as prices move.
Intrinsic value and moneyness
The amount by which an option is in the money is its intrinsic value. For a call:
For a put:
- is the current market price of the underlying asset.
- is the option's strike, or exercise, price.
- means the larger of the two values, so intrinsic value is never negative.
Suppose bitcoin trades at 60,000 dollars. A call with a strike of 55,000 is in the money with an intrinsic value of 5,000. A call with a strike of 65,000 is out of the money with zero intrinsic value. A put with a strike of 65,000 is in the money by 5,000, while a put with a strike of 55,000 is out of the money.
| Option | In the money when | Out of the money when |
|---|---|---|
| Call | Market price above strike | Market price below strike |
| Put | Market price below strike | Market price above strike |
Time value and pricing
An option's premium, for a call sometimes called the call premium, is made up of intrinsic value plus time value, the extra amount buyers pay for the chance that the option will become more valuable before it expires. Out-of-the-money options consist entirely of time value. They are cheaper than in-the-money options but more likely to expire worthless. Time value tends to be greatest for at-the-money options and shrinks as expiry approaches, a process called time decay. Models such as the Black-Scholes model estimate premiums using the price, strike, time to expiry, interest rates and expected volatility.
Traders sometimes speak of options being deep in the money, which behave much like the underlying asset itself, or far out of the money, which act like low-cost bets on a large move. Because of this, the choice of strike shapes how much risk an options position carries.
Exercise and expiry
At expiry, in-the-money options are normally exercised or cash-settled, often automatically, and out-of-the-money options expire worthless. American-style options can be exercised before expiry, while European-style options, common for index and many crypto options, can only be exercised at the end. A holder of an in-the-money option may still make a loss overall if the intrinsic value at expiry is smaller than the premium originally paid. Most option positions are closed by selling them before expiry rather than by exercise.
Use in strategies and crypto markets
- Hedging. Investors often buy out-of-the-money puts as relatively cheap insurance against a sharp fall, a form of hedging.
- Income. Writers of covered calls typically sell out-of-the-money calls, collecting the premium while keeping some upside.
- Speculation. Buyers of far out-of-the-money options pay little but need a large move to profit.
- Crypto options. Bitcoin and ether options trade on specialist crypto venues and on regulated exchanges, and are described more generally under options contract and derivatives.
Options carry the risk of losing the whole premium, and selling options can lead to losses larger than the premium received. Nothing here is investment advice.