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

This page explains the difference between in the money (ITM) and at the money (ATM) options, using examples of both calls and puts.

In the money vs. at the money

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.

Example

Let's say the shares of Citigroup (C) 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 Citigroup 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 Citigroup.

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 (Citigroup) 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 Citigroup example, we have 2 in the money options:

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

What about the remaining two options?

We have not talked about the remaining two 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. See more about in the money vs. at the money vs. out of the money differences.

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