Definition
In the Money (ITM) / Out of the Money (OTM)
Terms describing the intrinsic value status of an option relative to the underlying asset's current market price. A call option is in-the-money (ITM) when the market price exceeds the strike price. A put option is ITM when the market price is below the strike price. Options are out-of-the-money (OTM) when they have no intrinsic value (opposite conditions), and at-the-money (ATM) when the market price equals the strike price. Only ITM options have intrinsic value and are typically exercised.
An investor holds a call option with a $50 strike when the stock trades at $55. This call is $5 in-the-money (market $55 > strike $50), with $5 intrinsic value. Conversely, a put option with a $60 strike on the same $55 stock is $5 in-the-money (market $55 < strike $60). A call with a $60 strike would be $5 out-of-the-money (no intrinsic value), and an option with a $55 strike would be at-the-money (market = strike).
Students frequently reverse the conditions for calls vs puts. Remember: calls profit when prices rise (ITM when market > strike), while puts profit when prices fall (ITM when market < strike). Another common error is forgetting that at-the-money options (market = strike) have zero intrinsic value despite being neither ITM nor OTM. Students also confuse intrinsic value (ITM amount) with total option premium (intrinsic value + time value). Finally, many forget that OTM options can still have significant value due to time value, especially if expiration is far away.
How is In the Money (ITM) / Out of the Money (OTM) tested on the exam?
- Determining whether a call or put option is ITM, ATM, or OTM given market price and strike price
- Calculating intrinsic value for ITM options (market - strike for calls, strike - market for puts)
- Identifying which options would be exercised at expiration based on moneyness
- Understanding that OTM options expire worthless if not exercised before expiration
- Recognizing that only ITM options have intrinsic value while all options can have time value
CALL = Can profit by calling stock away when price is HIGH (ITM when market > strike). PUT = Can profit by putting stock to seller when price is LOW (ITM when market < strike). Think: "Calls go UP, Puts go DOWN" for ITM status. At-the-money = Equal = No intrinsic value (market = strike).
Practice questions
Test your understanding with the questions below. Pick an answer to reveal the explanation.
Marcus owns four different options on ABC stock, which is currently trading at $48 per share. He reviews his positions: a call option with a $45 strike, a put option with a $45 strike, a call option with a $50 strike, and a put option with a $52 strike. At expiration, which options would have intrinsic value and be worth exercising (assuming no transaction costs)?
A is correct. At a market price of $48, two options are in-the-money and worth exercising:
• $45 call is ITM: Market ($48) > strike ($45), so the call has $3 intrinsic value ($48 - $45). Marcus can buy at $45 and sell at $48 for a $3 profit.
• $52 put is ITM: Strike ($52) > market ($48), so the put has $4 intrinsic value ($52 - $48). Marcus can buy at $48 and sell (put) at $52 for a $4 profit.
B is incorrect because the $50 call is OTM (market $48 < strike $50), not ITM. It has zero intrinsic value and would expire worthless. C is incorrect because the $45 put is OTM (market $48 > strike $45), not ITM. It has zero intrinsic value and would not be exercised. D is incorrect because only 2 of the 4 options are ITM; the other two are OTM with zero intrinsic value.
The Series 65 exam tests your ability to quickly determine which options are in-the-money based on the relationship between market price and strike price. This is critical for understanding exercise decisions, option valuation, and advising clients on whether to exercise or let options expire. Remember: calls are ITM when market > strike, puts are ITM when market < strike.
Which statement correctly describes when a put option is in-the-money?
B is correct. A put option is in-the-money when the market price of the underlying security is below the strike price. In this scenario, the put holder can sell the security at the (higher) strike price, creating intrinsic value equal to strike minus market price.
A describes when a call option is ITM, not a put. This is the most common confusion point: calls and puts have opposite ITM conditions. C describes an at-the-money (ATM) option, which has zero intrinsic value regardless of whether it is a call or put. D is incorrect because it confuses premium with moneyness. Options can have premium greater than intrinsic value (due to time value), but this does not define ITM status. ITM is determined solely by the relationship between market price and strike price.
The Series 65 exam frequently tests the fundamental definitions of ITM, ATM, and OTM status for both calls and puts. You must distinguish between calls (ITM when market > strike) and puts (ITM when market < strike). This foundational knowledge is essential for all option-related questions, including suitability, exercise decisions, and risk analysis.
An investor holds a put option on XYZ stock with a strike price of $65. XYZ is currently trading at $58 per share. What is the intrinsic value of this put option?
C is correct. Calculate the intrinsic value of an ITM put: Strike Price - Market Price = $65 - $58 = $7. Since the market price ($58) is below the strike price ($65), this put is in-the-money by $7. The holder can buy stock at $58 and exercise the put to sell at $65, realizing $7 intrinsic value per share.
A ($0) would be correct if the put were out-of-the-money (market > strike), but since $58 < $65, the put has intrinsic value. B ($3) incorrectly reverses the subtraction ($58 - $65 = -$7, then taking absolute value but getting the wrong number), or confuses this with a different scenario. D ($123) incorrectly adds the strike and market prices ($65 + $58) instead of subtracting them.
The Series 65 exam tests your ability to calculate intrinsic value for both calls and puts. For puts, the formula is Strike - Market (opposite of calls, which use Market - Strike). Intrinsic value calculations are fundamental to option pricing, exercise decisions, and understanding profit/loss scenarios. Remember: intrinsic value can never be negative; OTM options have zero intrinsic value.
All of the following statements about in-the-money and out-of-the-money options are accurate EXCEPT
B is correct (the EXCEPT answer). This statement is FALSE. Out-of-the-money options do NOT always expire worthless simply because they lack intrinsic value. OTM options can still have significant time value, especially if expiration is far away or volatility is high. An OTM option might be worth selling before expiration to capture remaining time value. The statement incorrectly claims OTM options "have no time value," which is false.
A is accurate: ITM options have intrinsic value calculated as the favorable difference (market - strike for calls, strike - market for puts). B is accurate: calls are ITM when market > strike, which is the fundamental definition. D is accurate: at expiration, time value drops to zero, so only ITM options (those with intrinsic value) are worth exercising. OTM options expire worthless at expiration because they have zero intrinsic value and zero time value.
The Series 65 exam tests your understanding of the distinction between intrinsic value (ITM amount) and time value (additional premium). OTM options have zero intrinsic value but can have substantial time value before expiration. This is critical for advising clients on whether to exercise, sell, or hold options positions, and for understanding why OTM options still trade at positive prices.
DEF stock is currently trading at $42 per share. An investor is analyzing four option positions. Which of the following statements are accurate?
1. A call option with a $40 strike is $2 in-the-money
2. A put option with a $40 strike is $2 out-of-the-money
3. A call option with a $45 strike is at-the-money
4. A put option with a $47 strike is $5 in-the-money
D is correct. With DEF trading at $42, statements 1, 2, and 4 are accurate.
Statement 1 is TRUE: A $40 call is ITM because market ($42) > strike ($40). Intrinsic value = $42 - $40 = $2 in-the-money.
Statement 2 is TRUE: A $40 put is OTM because market ($42) > strike ($40). Puts are ITM when market < strike, so this put has zero intrinsic value and is $2 out-of-the-money.
Statement 3 is FALSE: A $45 call is NOT at-the-money. At-the-money means market = strike. Since market ($42) < strike ($45), this call is $3 out-of-the-money, not at-the-money.
Statement 4 is TRUE: A $47 put is ITM because market ($42) < strike ($47). Intrinsic value = $47 - $42 = $5 in-the-money.
The Series 65 exam tests your ability to evaluate multiple option positions simultaneously and correctly apply ITM/OTM/ATM definitions to both calls and puts. You must quickly determine moneyness for different strikes and option types, calculate intrinsic values, and distinguish between at-the-money (market = strike) and out-of-the-money (no intrinsic value). This skill is essential for portfolio analysis and option strategy recommendations.
What concepts relate to In the Money (ITM) / Out of the Money (OTM)?
This term is part of this cluster :