What is a Option Moneyness?
You will hear the following terms when dealing with options: in the money, at the money, and out of the money. All three of these terms refer to the price of the options underlying security relative to the strike price of a specific option on that security.
In the Money (ITM)
If the underlying security value is higher than the strike price of a call option, the option will have intrinsic value and is said to be "In the Money", or ITM for short. Put options work the opposite way; if the underlying security is valued less than the strike price of the option, the option is ITM. At expiration, the time value component of the option has completely decayed, leaving the option worth its intrinsic value.
To take this one step further, an option which is significantly in a profit position is considered Deep in the Money. Deep in the money options are significantly in the money to the point where there is very little risk of them losing enough value to take them out of the money. For example, if the strike price of a call option is $15 and the stock is worth $25, we can call this deep in the money. Deep in the money options also have a very high delta, close to 1, -1 for puts. High delta indicates that the option will nearly move $1 for every $1 point move in the underlying.
Out of the Money (OTM)
For a call option, "Out of the Money" indicates that an options strike price is above the current price of the underlying security. If the option is out of the money, it has no intrinsic value and is only worth the time premium. Again, the reverse can be said about put options; they are Out of the Money if the current price of the stock is above the strike price of the option.
Options in this category can also be classified as deep out of the money options as well. Deep out of the money call options have a strike price well above the current price of the security. Again, the odds of a deep out of the money option going into the money are very low and as such, the delta is very low for these options. This means that the options will not move up as fast as the stock does in the case that the stock starts to rally.
At the Money (ATM)
"At the Money" refers to the underlying security having the same value, or one that is very close to the options strike price and is also known as ATM.