What does it mean for an option to be in the money?

Moneyness is the single word for where the strike sits relative to the current price. It is the first thing a practitioner reads off a contract, because it sets everything else: how the premium is composed, how it decays, and how it behaves when the stock moves.

The three states

• In the money (ITM) — exercising right now would produce value.
• At the money (ATM) — the strike sits at (or nearest to) the current price.
• Out of the money (OTM) — exercising right now would be pointless.

Calls and puts are exact mirrors. With the stock at $100:

A call is in the money when the stock is above the strike; a put when the stock is below it. The two are never in the money at once at the same strike.

The trap: moneyness is not profit

This one costs people real money. "In the money" says nothing about whether you are ahead — it describes the contract, not your trade.

Say you bought the $90 call for $12.00 when the stock was at $98. The stock is now $100. The call is ITM by $10 — and you are down $2 per share ($200), because you paid $12 for something currently worth $10 of exercise value.

The reverse also happens. An option can be OTM and still be a winner if you bought it cheaper than it trades now. Your profit is decided by the premium you paid versus the premium today, not by which side of the strike the stock is sitting on.

Why the state matters mechanically

Three consequences you will meet in the next lessons:

• Composition. An OTM option's premium is entirely the value of possibility. An ITM option's premium contains a hard, exercisable core plus that possibility on top.
• Decay. The possibility part evaporates with time; the exercisable core does not. So OTM options decay to nothing, while deep ITM options barely decay at all.
• Sensitivity. A deep ITM call moves nearly dollar-for-dollar with the stock; a far OTM call barely twitches. That is delta, and it is Unit 3.

Reading a chain

Options are quoted in a chain: every strike for a given expiry, calls on one side, puts on the other. Scan down the call column and premiums fall monotonically as strikes rise — because the right to buy at $90 is plainly worth more than the right to buy at $110. Scan the put column and the pattern inverts. If a chain ever violates that ordering, you are looking at stale or illiquid quotes, not an opportunity.

In the data

Apple's chain is below, in the EODHD Terminal, with the in-the-money cells tinted on each side of the strike column.

Open AAPL.US — options in the EODHD Terminal

Moneyness is also published as a single number per contract, and there is no one convention for it. Some screens state it as a difference (spot minus strike), some as a ratio (strike over spot, or the reverse), and the sign flips between calls and puts. A figure read or sorted without first checking one contract against its strike and today's price can come out inverted end to end.

Try it now

1. In the chain above, open one expiry roughly three months out and mark each call ITM, ATM or OTM against the current price. Then do the same for the puts on the other side of the strike column, and notice that every label flips. Check the Terminal's tint against your own marks before you trust either.

2. Check that call premiums fall as strikes rise and put premiums rise as strikes rise. Where the pattern breaks, check volume and open interest — thin contracts quote badly.

3. Pick one ITM call and compute (spot − strike). Compare that number with the premium. The gap between them is the entire subject of the next lesson.