Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
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In options trading, knowing the difference between being “in the money” (ITM) and “out of the money” (OTM) allows the holder of a contract to know whether they might realize a profit from their option. The terms refer to the relationship between the option contract’s strike price and the market value of the underlying asset.
“In the money” refers to options that may be profitable if exercised today, while “out of the money” refers to those that lack intrinsic value. In the rare case that the market price of an underlying security reaches the strike price of an option exactly at the time of expiry, this is considered an “at the money option.”
Key Points
• Understanding the difference between “in the money” and “out of the money” options can help options traders gauge potential profitability.
• Options classified as “in the money” have intrinsic value and may be profitable if exercised, while “out of the money” options lack intrinsic value and may expire worthless.
• The potential for profit from options largely depends on the relationship between the strike price and the current market price of the underlying asset.
• Options based on assets with higher volatility are often written “out of the money,” which can appeal to speculators due to their typically lower premiums and the potential for larger price swings.
• Decisions to buy “in the money” or “out of the money” options should align with an investor’s goals, risk tolerance, and outlook for the underlying asset’s future performance.
What Does “In the Money” Mean?
In the money (ITM) describes a contract that may result in a profit if its owner were to choose to exercise the option today. If this is the case, the option is said to have intrinsic value.
A call option would be in the money if the strike price is lower than the current market price of the underlying security. An investor holding such a contract could exercise the option to buy the security at a discount and potentially sell it for a profit.
Put options, which are a way to speculate on a decline of a stock (known as shorting a stock), would be in the money if the strike price is higher than the current market price of the underlying security. A contract of this nature allows the holder to sell the security at a higher price than it currently trades for and potentially profit from the difference.
In either case, an in the money contract has intrinsic value, so the options trader may choose to exercise the option to profit from it, assuming the gains exceed the premiums paid to purchase the contract.
Example of In the Money
For example, say an options trader owns a call option with a strike price of $15 on a stock currently trading at $17 per share. This option would be in the money because its owner could exercise the option to realize a profit. The contract gives the holder the right to buy 100 shares of the stock at $15, even though the market price is currently $17.
The contract holder could take shares acquired through the contract for a total of $1,500 and potentially sell them for $1,700, hypothetically realizing a profit of $200 minus the premium paid for the contract and any associated trading fees or commissions.
While call options give the holder the right to buy a security, put options give holders the right to sell. For example, say an investor owns a put option with a strike price of $10 on a stock that is trading at $8 per share. This would be an in the money option. The holder could sell 100 shares of stock at a price of $10 for a total of $1,000, even though those shares are only worth $800 shares on the market. The contract holder would then realize that difference of $200 as profit, minus the premium and any fees.
What Does “Out of the Money” Mean?
Out of the money (OTM) is the opposite of being in the money. OTM contracts do not have intrinsic value. If an option is out of the money at the time of expiration, the contract expires worthless. Options are out of the money when the relation of their strike prices to the current market price of their securities is the opposite of in the money options: they have no intrinsic value but may still carry time value before expiration.
For calls, an option with a strike price higher than the current price of the underlying security would be out of the money. Exercising such an option through a brokerage (or online brokerage) would result in an investor buying a security for a price higher than its current market value.
For puts, an option with a strike price lower than the current price of its security would be out of the money. Exercising such an option would cause an investor to sell a security at a price lower than its current market value.
In either case, the contracts are out of the money because they don’t have intrinsic value – anyone exercising those contracts could incur a loss.
Example of Out of the Money
Say an investor buys a call option with a strike price of $15 on a stock currently trading at $13. This option would be out of the money. An investor might buy an option like this in the hopes that the stock may rise above the strike price before expiration, in which case a profit may be realized.
Another example would be an investor buying a put option with a strike price of $7 on a stock currently trading at $10. This would also be an out of the money option. An investor might buy this kind of option with the belief that the stock may fall below the strike price before expiration.
What’s the Difference Between In the Money and Out of the Money?
The premium of an options contract involves two different factors: intrinsic value and extrinsic value. Options that have intrinsic value at the time they are written have a strike price that is favorable relative to the current market price. In other words, such options are already in the money when written.
But not all options are written ITM. Those without intrinsic value rely instead on their extrinsic value. This value comes from speculative bets that investors make over a period of time. For this reason, options contracts based on assets with higher volatility are often written out of the money, as investors anticipate there may be bigger price swings. Lower options premiums could make these contracts appealing, despite possible lower probabilities of profit. Conversely, assets considered to be less volatile often have their options written in the money.
Options written out of the money may appeal to speculators because their contracts may come with lower premiums and offer a high potential payoff relative to cost, despite a lower chance of expiring in the money.
Recommended: Popular Options Trading Terminology to Know
Should I Buy ITM or OTM Options?
The answer to this question depends on an investor’s goals and risk tolerance. Options that are further out of the money may offer higher potential rewards but can come with greater risk, uncertainty, and volatility. Whether an option is in or out of the money (and the extent that it’s out of the money), can impact the premium for that option, as can the amount of time before expiry and its level of implied volatility.
Whether to buy ITM or OTM options also depends on how confident an investor feels about the future of the underlying asset. If a trader believes that a particular stock may trade at a much higher price three months from now, then they might not hesitate to buy a call option with a very high strike price, which would be both deeply out of the money and likely lower cost.
Conversely, if an investor thinks a stock may decline in value, they might buy a put option with a very low strike price, which would also make the option out of the money and lower cost.
Beginning options traders and those with lower risk tolerance may prefer buying options that are only somewhat out of the money or those that are in the money. These options often have lower premiums than in-the-money contracts, and cost more than deeply out-of-the-money options, striking a balance between affordability and probability. There are also generally greater odds that the contract might end up in the money before expiration, as it requires a less dramatic move to make that happen.
Investors can also choose to combine multiple options legs into a spread strategy that attempts to take advantage of both possibilities.
Recommended: 10 Important Options Trading Strategies
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The Takeaway
In options trading, “in the money” refers to options that offer profit potential if exercised immediately (having extrinsic value), while “out of the money” refers to those that don’t (lacking intrinsic value). Options contracts don’t necessarily have to be exercised for a trader to realize a profit from them. Sometimes investors buy out-of-the-money contracts with the intent of selling them on the open market for a profit if they move into the money before expiration. Though, of course, they risk losing the premium paid if the option remains out of the money and expires worthless.
In either case, it’s important to consider if an option is in the money or out of the money when buying or writing options contracts, as well as when deciding when to execute them. Options trading is an advanced investing strategy, and investors may benefit from understanding the risks before participating or consulting a financial professional for guidance.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
Frequently Asked Questions
What is the difference between in the money and out of the money?
ITM options have intrinsic value because the strike price is favorable relative to the market price. OTM options have no intrinsic value and would not be profitable if exercised immediately. ITM options generally cost more, while OTM options tend to have lower premiums and rely on the price of the underlying asset moving in a favorable direction before expiration.
What is the difference between ITM and OTM options?
ITM options can be exercised at a price that’s better than the current market value, giving them intrinsic value. OTM options have strike prices that are not favorable relative to the market price and therefore have no intrinsic value. ITM options are more expensive but carry a higher probability of expiring with value, while OTM options are cheaper but more speculative.
What is the difference between an out-of-the-money and in-the-money put?
An ITM put has a strike price above the current market price of the underlying asset, which gives it intrinsic value. An OTM put has a strike price below the current market price, so it cannot currently be exercised for a profit. The difference lies in whether the put option would generate value if exercised immediately.
How can you tell if an option is in or out of the money?
Check the relationship between the option’s strike price and the current market price of the underlying asset. A call is in the money when the strike price is below the market price; it’s out of the money when the strike is above. For puts, it’s the opposite: the option is in the money when the strike is above the market price and out of the money when it’s below.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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