Moneyness describes the relationship between an option’s strike price and the current stock price, categorizing options as in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM). This simple concept drives everything in options trading – from premium levels to assignment probability to strategy selection. Understanding moneyness helps you quickly evaluate risk, choose appropriate strikes, and manage positions effectively. It’s the GPS coordinate system of options, instantly telling you where you stand and what to expect from any position.
The Three States of Moneyness
Options exist in one of three states:
In-The-Money (ITM)
Has intrinsic value – would be profitable to exercise now:
- Calls: Strike below stock price
- Puts: Strike above stock price
- High assignment probability
- Expensive due to intrinsic value
- Moves closely with stock
At-The-Money (ATM)
Strike equals (or very near) current stock price:
- Both calls and puts: Strike ≈ stock price
- Maximum time value
- Highest theta decay
- Most sensitive to movement
- ~50% assignment probability
Out-of-The-Money (OTM)
No intrinsic value – would lose money if exercised now:
- Calls: Strike above stock price
- Puts: Strike below stock price
- Lower assignment probability
- Cheaper premiums
- Higher percentage returns
Moneyness Examples
Let’s see moneyness in action with XYZ at $50:
- $45 call: ITM by $5 (strike below stock)
- $50 call: ATM (strike equals stock)
- $55 call: OTM by $5 (strike above stock)
- $55 put: ITM by $5 (strike above stock)
- $50 put: ATM (strike equals stock)
- $45 put: OTM by $5 (strike below stock)
Notice how puts flip the relationship – higher strikes become ITM.
Intrinsic vs Extrinsic Value
Moneyness determines value components:
ITM Option Breakdown
$45 call with stock at $50, trading at $5.75:
- Intrinsic value: $5.00 (could exercise for $5 profit)
- Extrinsic value: $0.75 (time value + volatility)
- Total premium: $5.75
ATM Option Breakdown
$50 call with stock at $50, trading at $1.50:
- Intrinsic value: $0 (no profit if exercised)
- Extrinsic value: $1.50 (all time/volatility value)
- Total premium: $1.50
OTM Option Breakdown
$55 call with stock at $50, trading at $0.35:
- Intrinsic value: $0 (would lose money if exercised)
- Extrinsic value: $0.35 (pure speculation value)
- Total premium: $0.35
Moneyness and Greeks
Each state has distinct Greek characteristics:
ITM Options
- Delta: High (0.70-1.00 calls, -0.70 to -1.00 puts)
- Gamma: Low and stable
- Theta: Moderate decay
- Vega: Lower sensitivity
- Behave like stock positions
ATM Options
- Delta: ~0.50 (calls) or ~-0.50 (puts)
- Gamma: Maximum – explosive
- Theta: Maximum decay
- Vega: Maximum sensitivity
- Most responsive to everything
OTM Options
- Delta: Low (0-0.30 calls, 0 to -0.30 puts)
- Gamma: Low but can spike
- Theta: Lower dollar decay, high percentage
- Vega: Moderate sensitivity
- Lottery ticket characteristics
Moneyness for Income Strategies
Strategic moneyness selection for different goals:
Conservative Income (Far OTM)
- Stock at $50, sell $45 put for $0.20
- 0.15 delta (~85% win rate)
- Lower premium but higher probability
- Survives normal fluctuations
Balanced Income (Near OTM)
- Stock at $50, sell $48 put for $0.50
- 0.25 delta (~75% win rate)
- Sweet spot for most traders
- Good premium/probability balance
Aggressive Income (ATM)
Sell ATM puts:
- Stock at $50, sell $50 put for $1.00
- 0.50 delta (~50% win rate)
- Maximum premium collected
- Requires active management
Moneyness Transitions
Options change moneyness as stock moves:
Example Transition
Sold $48 put when stock was $50 (OTM):
- Day 1: Stock at $50, put is OTM (safe)
- Day 3: Stock at $48, put is ATM (danger zone)
- Day 5: Stock at $46, put is ITM (assignment likely)
This transition affects:
- Premium value (increases as moves ITM)
- Management decisions (roll or accept)
- Greeks behavior (delta accelerates)
Moneyness and Time
Time to expiration affects moneyness impact:
Far From Expiration (30+ DTE)
- Gradual moneyness changes
- Time to recover if moves against
- Lower gamma risk
- Smoother transitions
Near Expiration (0-7 DTE)
- Binary outcomes approach
- Sharp moneyness boundaries
- High gamma risk
- Violent premium swings
This is why ATM options get dangerous in final week.
Using Moneyness for Decisions
Quick position assessment:
Entry Decisions
Selling Options:
- OTM: Higher probability, lower premium
- ATM: Balanced risk/reward
- ITM: Usually avoided (high assignment risk)
Buying Options:
Management Decisions
Position moved ITM:
- Roll before expiration
- Accept assignment
- Close at loss
- Adjust strikes
Position still OTM:
- Let theta work
- Consider closing at 50% profit
- Roll for more premium
- Hold to expiration
Common Moneyness Mistakes
Selling ITM: Taking unnecessary assignment risk Buying Deep OTM: Lottery tickets rarely pay Ignoring Transitions: Not monitoring changes Static Thinking: Moneyness changes constantly
Moneyness Scanning
Quickly evaluate opportunities:
Income Scan Example
Looking for weekly puts to sell:
- Find stocks with OTM puts paying 1%+
- Check delta (prefer 0.20-0.30)
- Verify support levels
- Confirm you’d own at strike
- Execute if criteria met
Moneyness helps filter thousands of options to handful of candidates.
Key Takeaways
Moneyness:
- Describes strike vs stock relationship
- ITM = intrinsic value exists
- ATM = maximum time value
- OTM = no intrinsic value
- Determines probability and risk
- Changes as stock moves
- Guides strategy selection
Moneyness is your options compass – instantly showing where you are and where you’re headed. Master this concept and you’ll quickly evaluate any option position, understanding its risks and rewards at a glance. Whether seeking income through OTM sales or speculation through ATM purchases, let moneyness guide your strike selection and position management.