An in-the-money (ITM) option has intrinsic value — the call's strike is below the stock price, or the put's strike is above it. An out-of-the-money (OTM) option has no intrinsic value and consists entirely of time and volatility premium. This distinction, called "moneyness," is the single biggest factor in an option's price and behavior.

The Three States of Moneyness

| State | Call Option | Put Option | Intrinsic Value | In the money (ITM)Strike < Stock priceStrike > Stock priceYes At the money (ATM)Strike ≈ Stock priceStrike ≈ Stock priceMinimal | Out of the money (OTM) | Strike > Stock price | Strike < Stock price | None |

Example with MSFT at $420:

  • $400 call = ITM by $20 (intrinsic value: $20)
  • $420 call = ATM (intrinsic value: ~$0)
  • $440 call = OTM (intrinsic value: $0)

    • How Moneyness Affects Option Price

    An ITM option always costs more than an equivalent OTM option because it contains intrinsic value on top of extrinsic value.

    Using MSFT at $420 with 30 days to expiration:

    | Strike | Type | Approximate Price | Intrinsic | Extrinsic | $400 callDeep ITM$24.00$20.00$4.00 $420 callATM$8.50$0.00$8.50 | $440 call | OTM | $2.00 | $0.00 | $2.00 |

    Notice that the ATM option has the most extrinsic value. This makes ATM options the most affected by time decay and volatility changes.

    Which Should You Trade?

    Buy ITM options when: You want the option to behave more like the stock. High delta (0.60–0.90) means the option moves nearly dollar-for-dollar with shares. Lower percentage returns but higher probability of profit.

    Buy ATM options when: You want a balance of leverage and probability. Delta around 0.50 means roughly a coin-flip chance of expiring ITM. This is where many traders find the best risk/reward for directional bets.

    Buy OTM options when: You expect a large move and want maximum leverage. Low delta (0.10–0.30) means cheap contracts, but they need a significant stock move to profit. Most expire worthless.

    Sell OTM options when: You want income with a probability edge. Selling a 0.20 delta put means there's roughly an 80% chance it expires worthless and you keep the premium. This is the basis of covered calls and cash-secured puts.

    The Probability Connection

    Delta serves as a rough probability estimate:

  • 0.80 delta (deep ITM) ≈ 80% chance of expiring ITM
  • 0.50 delta (ATM) ≈ 50% chance
  • 0.20 delta (OTM) ≈ 20% chance
  • 0.05 delta (far OTM) ≈ 5% chance

    • When you sell a 0.15 delta covered call, there's about an 85% chance you keep both the premium and your shares. That's the math behind income-focused options strategies.

    A Real-World Analogy

    Think of ITM options like buying a house that's already worth more than your mortgage — you have built-in equity. OTM options are like buying land in an area that might develop someday — it's speculative, but the payoff could be huge.

    Most successful income traders using OptionsPilot's screener focus on selling OTM options (typically 0.15–0.30 delta) to collect premium with a high probability of profit, while keeping ITM trades for targeted directional plays.

    Quick Summary

  • ITM options: higher cost, higher probability, lower leverage
  • ATM options: balanced, most time decay exposure
  • OTM options: lower cost, lower probability, higher leverage
  • Moneyness shifts as the stock moves — an OTM option can become ITM (and vice versa) in minutes