In, At and Out of the Money
Drag the stock price and watch a call and a put with the same strike flip between in the money and out of the money.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Options Basics, lesson 6: “In, At and Out of the Money”
Drag the stock price and watch a call and a put with the same strike flip between in the money and out of the money.
In the money = exercising now pays
When the stock is above the strike price, a call option is in the money (it has intrinsic value); below the strike it's out of the money; when the two are about equal, it's at the money.
Calls and Puts are exact opposites
Same stock price, same strike: when the Call is in the money, the put option is always out of the money, and vice versa.
“Depth” sets an option's personality
Deep out-of-the-money options are cheap but will most likely go to zero, like lottery tickets; deep in-the-money options are expensive and move almost one-for-one with the stock, like the stock itself; near at the money is the most “up in the air”.
Key takeaways
- In the money (ITM): exercising right now is worth something. Out of the money (OTM): no intrinsic value. At the money (ATM): the strike is about equal to the stock price.
- Call: in the money when stock > strike. Put: in the money when stock < strike.
- At the same stock price, a call and a put are exactly opposite in terms of ITM / OTM.
- Deep out-of-the-money options are like lottery tickets (cheap, usually expire worthless); deep in-the-money options act like the stock (expensive, moving almost one-for-one with it).
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click “Example: S $110 · K $100”: what state are the Call and Put each in? What's each one's intrinsic value?
- Slowly drag the stock from $60 to $140 and watch for the moment both badges flip at once.
- Leave the stock at $100 and drag only the strike: for the same stock, options at different strikes are in different states.
- Make the Call's intrinsic value exactly $15: what's the Put's intrinsic value then?
Quiz and explanations
- 1. The stock is $110. A call with a $100 strike is…
- Answer: In the money.You can buy a $110 stock for $100.
- 2. The stock is $110. A put with a $100 strike is…
- Answer: Out of the money.Selling a $110 stock for $100 isn't worth it.
- 3. The stock is $48. Which option is in the money?
- Answer: A $50-strike put.A put is in the money when the strike is above the stock price: you can sell a $48 stock for $50. The other three are all out of the money.
Terms in this lesson
- at the money (ATM) (ATM): An option whose strike is about equal to the current stock price.
- call option (Call): The right to buy the underlying at the strike price; the higher the stock goes, the more it's worth.
- intrinsic value (Intrinsic Value): What you'd get by exercising right now; for a call, max(stock price − strike, 0).
- in the money (ITM) (ITM): An option with intrinsic value, such as a call whose strike is below the stock price.
- out of the money (OTM) (OTM): An option with no intrinsic value, such as a call whose strike is above the stock price.
- put option (Put): The right to sell the underlying at the strike price; the lower the stock goes, the more it's worth.
- strike price (Strike): The price written into an option contract at which you can buy or sell.