# In the Money vs. At the Money Options: An Example

## In the money vs. at the money options

**In the money options** are options which **have positive intrinsic value**. This means that at the moment of expiration (when no time value is left), the option still represents some value if you exercise it. **At the money options** are options with **strike price equal** or very close to the *current* (the word current is very important) **market price of the underlying asset**.

If you only partly know what we are talking about now, the examples that follow will hopefully help clarify it. You may also want to read other articles explaining basic principles of options, which are summarized here: Options Basics.

## An example of in the money and at the money options

Let’s say the shares of *Caterpillar* (CAT) stock are trading at 70 dollars. This is the market price of the underlying stock, which is very important for **telling whether an option is in the money or at the money**.

You have the following options on Caterpillar expiring in a few weeks:

- A
*call*option with strike price of*60 dollars*, - A
*put*option with strike price of*60 dollars*, - A
*call*option with strike price of*70 dollars*, - A
*put*option with strike price of*70 dollars*, - A
*call*option with strike price of*80 dollars*, - A
*put*option with strike price of*80 dollars*.

**Which of these options are in the money and which of them are at the money?**

## At the money options

**At the money options** are options which have the **strike price approximately equal to the current market price of the underlying stock**. In our portfolio of 6 options, there are 2 at the money options:

- The call with the 70 dollar strike price and
- The put with the 70 dollar strike price.

The *intrinsic value* of both these options is approximately zero, as you would not get any advantage (= not make any money) by exercising them *given the current market price of Caterpillar*.

## In the money options

**In the money options have positive intrinsic value.** If you exercise in the money options, you are able to buy (if it’s a call) or sell (if it’s a put) the underlying stock (Caterpillar) for better price compared to what you would get in the stock market without using the option. What means better?

When you are **buying a stock**, **lower price is better**. Therefore, **call options** (rights to buy) with strike price *lower* than the current market price of the underlying stock have positive intrinsic value and they are in the money.

When you are **selling a stock**, you **prefer higher price**. Therefore, **put options** with strike price *higher* than the current market price of the underlying are better to own. They have positive intrinsic value and they are in the money.

In our Caterpillar example, we have **2 in the money options**:

- The
*call option*with the*60 dollar strike price*(if you exercise it, you can buy Caterpillar stock for less than 70); - The
*put option*with the*80 dollar strike*(you can sell Caterpillar stock for more than 70).

## What about the remaining two options?

We have not talked about the remaining 2 options:

- The
*80 dollar strike call*and - The
*60 dollar strike put*.

With the market price of the underlying stock equal to 70, these options are **out of the money** and their **intrinsic value is zero** (it can’t be negative because of the optionality – you can choose not to exercise).

**Every option is either in the money, at the money, or out of the money.** There is no fourth category. Here you can read more about the in the money vs. at the money vs. out of the money differences.