7 min
Intrinsic Value and Moneyness
Traders describe options as "in the money," "out of the money," or "at the money." These terms tell you whether an option currently has real value.
What you'll learn
- Define intrinsic value
- Understand ITM, OTM, and ATM
- Calculate intrinsic value for calls and puts
Intrinsic Value
Intrinsic value is the amount of real, tangible value an option has right now. It's the difference between the stock price and the strike price, but only when that difference is favorable.
For a call: Intrinsic Value = Stock Price − Strike Price (only if positive).
For a put: Intrinsic Value = Strike Price − Stock Price (only if positive).
Intrinsic value can never be negative.
For a put: Intrinsic Value = Strike Price − Stock Price (only if positive).
Intrinsic value can never be negative.
In the Money (ITM)
An option is in the money when it has intrinsic value. A call is ITM when the stock price is above the strike. A put is ITM when the stock price is below the strike.
Out of the Money (OTM)
An option is out of the money when it has no intrinsic value. A call is OTM when the stock price is below the strike. A put is OTM when the stock price is above the strike.
At the Money (ATM)
An option is at the money when the stock price equals (or is very close to) the strike price.
Moneyness Example
Stock trades at $110. A $100-strike call is ITM (intrinsic value = $10). A $120-strike call is OTM (intrinsic value = $0). A $110-strike call is ATM.
Knowledge Check
A put option has a $100 strike. The stock is trading at $85. Is this put ITM or OTM, and what is its intrinsic value?
The put is in the money (ITM). Intrinsic value = $100 - $85 = $15. The stock is below the strike, so the right to sell at $100 is valuable.