What do "in the money," "at the money," and "out of the money" mean in options?

Ever been confused by the terms "in the money," "at the money," and "out of the money" (ITM, ATM, and OTM)? In this episode, we break down these core options trading concepts based on a simple, straightforward article. We'll show you how the relationship between the stock's price and your option's strike price defines these terms and, most importantly, why understanding this difference is absolutely fundamental to your trading.

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Key Takeaways

• In the money (ITM) options have intrinsic value; for a call, the stock price is higher than the strike, and for a put, the stock price is lower than the strike.
• At the money (ATM) options have zero intrinsic value and are where the strike price is the same as the stock price. They typically have the most extrinsic value, making them highly sensitive to price changes but also subject to rapid time decay.
• Out of the money (OTM) options have zero intrinsic value and are the cheapest, offering the most leverage. For a call, the strike is higher than the stock, and for a put, the strike is lower. They are the riskiest for buyers, as most expire worthless, but a favorite for sellers.

An option’s state (ITM, ATM, OTM) is dynamic and changes as the stock price moves and time passes, constantly impacting its value and risk profile.

"When you look at an option chain, think about which state—ITM, ATM, or OTM—actually aligns with your specific goal for that potential trade."

Timestamped Summary

• 0:45 The core goal: Unpacking ITM, ATM, and OTM
• 1:42 Defining "In the Money" (ITM) and intrinsic value
• 4:05 Explaining "At the Money" (ATM) and extrinsic value
• 7:08 Breaking down "Out of the Money" (OTM) and its characteristics
• 10:29 Why the ITM/ATM/OTM distinction matters for your trading

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