In The Money vs Out of The Money: What Traders Need to Know

Options trading might sound complicated at first, but once you understand the basics, it becomes much easier to navigate. Two of the most important terms every trader should know are In the Money (ITM) and Out of the Money (OTM).

For anyone learning the ropes, getting familiar with how stock options work will provide a strong foundation for these concepts.

These simple concepts can completely change how you approach buying options, setting strike prices, and managing your risk. Whether you’re trading stocks or crypto, knowing the difference between ITM and OTM helps you decide which trades offer the best balance of reward and risk.

In this guide, we’ll break down what it means for an option to be in the money or out of the money, why it matters for your trading strategy, and how real-world examples can help you put this knowledge into action. Let’s get started!

What Does “In the Money” and “Out of the Money” Mean?

In options trading, knowing the difference between In the Money (ITM) and Out of the Money (OTM) is essential for crafting the right strategy. These terms describe whether an option has any intrinsic value or not. Here, we’ll explain both terms to help you get a clearer picture of what they mean in practical trading scenarios.

To better understand how these terms affect pricing, it’s also helpful to explore the difference between intrinsic and time value—the two components that shape every trade.

ITM Meaning: What Is “In the Money”?

When an option is in the Money (ITM), it means that the option already has intrinsic value. For a call option, the strike price is lower than the current market price of the underlying asset. This means that the option holder can exercise the option and profit immediately.

For example, if you hold a call option for a stock with a strike price of $50, and the stock is trading at $60, this option is In the Money because you could exercise the option and buy the stock for $50, then sell it for $60, realizing a profit of $10 per share.

For a put option, the scenario is reversed. If the strike price is higher than the current market price of the stock, the put option is in the Money. A put option gives the holder the right to sell the stock at the strike price. For example, if a stock is trading at $40 and the strike price of the put option is $50, the option is ITM, allowing the trader to sell the stock at a higher price than its current value.

OTM Meaning: What Is “Out of the Money”?

An option that is out of the Money (OTM) does not have any intrinsic value. For a call option, this means the current market price of the underlying asset is lower than the strike price. Therefore, the option has no immediate value and cannot be exercised profitably.

For example, if you own a call option with a strike price of $70, but the stock is currently trading at $60, this is an out-of-the-money option. You cannot profit from exercising this option because the market price is below the strike price, making it unprofitable.

Similarly, for a put option, an OTM option means the stock price is higher than the strike price. If the stock is trading at $60, and the put option has a strike price of $50, the option is OTM. It’s cheaper than an ITM option but doesn’t offer any immediate value unless the market price drops below $50.

Traders often use chart patterns to anticipate when an OTM option might move into the money before expiration.

The Idea of “Moneyness” in Options Trading

To understand whether an option is ITM or OTM, it’s important to know the concept of moneyness. Moneyness refers to the relationship between the current price of the underlying asset and the strike price of the option.

What Is Moneyness?

Moneyness simply refers to how close the strike price is to the current price of the asset. If the price of the asset has moved in a direction that makes the option profitable, it is considered in the Money. If the price has not yet moved in the desired direction, the option is out of the Money.

For instance, if the market price is higher than the strike price for a call option, the option is ITM. Conversely, if the strike price is higher than the market price, the call option is OTM.

Why Moneyness Matters in Every Trade

Moneyness is crucial because it determines the value of the option. Knowing whether an option is ITM or OTM helps traders understand how much value the option holds at a given moment. The closer an option is to being ITM, the more valuable it is. Understanding moneyness allows traders to plan their strategies accordingly, adjusting their risk management to align with the profit potential.

How In the Money vs Out of the Money Works in Real Life

Let’s dive deeper into real-life examples of ITM and OTM options to see how these concepts apply practically in the market.

Example of an ITM Call Option

An ITM call option means that the underlying asset’s price has already surpassed the strike price. For instance, let’s say a stock is trading at $100, and you hold a call option with a strike price of $90. Since the stock is above $90, the option is ITM. You can exercise the option and buy the stock at $90, making a profit by selling it at the current market price of $100.

The key to ITM options is that they already have value, unlike OTM options. This gives them a higher cost but also reduces risk because they’re more likely to provide a profitable outcome.

Example of an OTM Call Option

Let’s take an example of an OTM call option. Suppose a stock is currently trading at $100, but you have a call option with a strike price of $120. This option is OTM because the stock price is not yet high enough for the option to be profitable. The option may still have some time value, but it has no intrinsic value. If the stock rises above $120 before expiration, then the option will move into ITM territory.

OTM options are cheaper than ITM options, which makes them appealing to traders with smaller budgets, but they carry the risk of losing the entire investment if the market does not move in the right direction.

Comparing In the Money vs Out of the Money Calls and Puts

It’s important to understand how ITM and OTM options work differently for both calls and puts.

ITM vs OTM Calls

• ITM Calls: When a call option is ITM, the stock price is already above the strike price. This means that the call option has intrinsic value, and the option holder can exercise the option immediately for a profit. However, ITM call options are more expensive because they already have value.
• OTM Calls: OTM call options, on the other hand, are cheaper since they don’t have any intrinsic value. These options rely on the price of the underlying asset moving significantly before expiration to become profitable. OTM calls have higher potential for reward, but they also come with higher risk since they may expire worthless.

ITM vs OTM Puts

• ITM Puts: A put option is ITM when the strike price is higher than the current market price of the underlying asset. For example, if the stock is trading at $50 and the strike price of the put option is $60, the option has intrinsic value. The holder can sell the stock at $60 and make a profit.
• OTM Puts: Conversely, a put option is OTM when the strike price is lower than the current market price of the stock. In this case, there’s no intrinsic value, and the option will only become profitable if the stock price falls below the strike price before expiration.

Benefits and Risks of In-the-Money Options

Before jumping into a trade, it’s important to understand both the good and bad sides of choosing in-the-money options. These types of contracts already have real value, which can make them feel safer than others. But that safety comes at a cost. Let’s break down why many traders like ITM options and what you need to watch out for when using them in your trading strategy.

Why Traders Pick ITM Options

In-the-money options are often seen as the safer choice, especially for traders who want more control and less risk. Because these options already have some built-in value, they’re less likely to expire worthless. This makes them appealing to people who want more predictable outcomes. They’re also helpful in choppy or uncertain markets, where price swings can make out-of-the-money trades too risky. Many traders use ITM options as part of a hedging strategy—using them to protect a bigger position from going the wrong way. The stability of these contracts makes them a good fit for investors who prefer consistent, lower-risk returns rather than taking big chances.

Drawbacks of ITM Trades

The downside is the cost. Since in-the-money options already have real value, they cost more to buy. This higher price can eat into your potential profit. If the market doesn’t move much after you enter the trade, your return might be smaller. You’ve paid more upfront, so the stock or crypto asset needs to keep moving in your favor just to break even. So while ITM options lower the risk, they also limit how much you can make if the market only moves a little.

Benefits and Risks of Out of the Money Options

Why Traders Like OTM Options

OTM options are often chosen by traders who are willing to take higher risks for the potential of a higher reward. They are cheaper than ITM options, which allows traders to get in with a smaller capital investment. If the market moves in the right direction, OTM options can provide significant returns relative to the small upfront cost.

The Risk of Losing It All

However, the biggest risk with OTM options is that they may expire worthless. Since OTM options have no intrinsic value, they rely entirely on the market price moving in the desired direction. If the price doesn’t move enough, the option will lose its entire value, meaning traders can lose their investment entirely.

In the Money vs Out of the Money: Which One Should You Choose?

The choice between ITM and OTM options depends on your strategy, capital, and risk tolerance.

It Depends on Your Strategy

If you’re looking for a safer, more predictable investment, ITM options may be the way to go. However, if you’re looking for big rewards and are willing to take on more risk, OTM options might be a better fit. The choice depends on your financial goals and risk appetite.

Think About Capital, Timing, and Volatility

Your capital, how much time you have before expiration, and the level of volatility in the market all play a role in deciding between ITM and OTM options. Traders should evaluate these factors to make an informed choice about which type of option fits their trading strategy.

Crypto Options vs Stock Options: Does Moneyness Still Matter?

While options trading works the same way in stocks and crypto, the way prices move can be very different. Crypto markets are known for fast and unpredictable swings, which means traders have to be extra careful when picking strike prices. Even though moneyness—whether an option has value or not—still matters in both markets, the speed and size of price changes in crypto can make a big difference in how your trades turn out.

Similar Rules, Different Volatility

Both crypto and stock options follow the same basic principles when it comes to moneyness, ITM, and OTM options. However, crypto options tend to be more volatile than stock options. This volatility impacts the potential returns and risks, making crypto options inherently more speculative.

This is why many investors review margin trading concepts to understand how leverage interacts with volatility in crypto markets.

Picking the Right Strike in Crypto Trades

When trading crypto options, choosing the right strike price can be tricky. Crypto prices can fluctuate dramatically, so it’s essential to base strike price decisions on recent market trends, news, and events that could affect the price.

Final Thoughts

Understanding the difference between In the Money (ITM) and Out of the Money (OTM) options is a major step toward making smarter trading decisions. ITM options offer more security and a higher chance of profit, but they come at a steeper price. OTM options, on the other hand, cost less upfront and offer bigger potential gains, but they carry a higher risk of expiring worthless.

There’s no one-size-fits-all answer for which is better—it depends on your goals, risk tolerance, and the market you’re trading in. Whether you’re trading stocks or crypto, knowing where your option stands on the moneyness scale helps you plan better and manage risk more effectively.

Always think about your capital, timing, and the current market volatility before choosing between ITM and OTM. The better you understand moneyness, the sharper your trading strategies will become.

Beginner Questions About In the Money and Out of the Money