When trading options, it’s important to understand how the strike price compares to the current price of the underlying stock. This relationship determines whether an option is In-the-Money (ITM), At-the-Money (ATM), or Out-of-the-Money (OTM)—a key factor in how much the option is worth and how likely it is to be profitable at expiration.
A call option is in-the-money when the stock price is above the strike price, because the buyer has the right to buy the stock at a lower price. A put option is in-the-money when the stock is below the strike price, since the seller can sell the stock at a higher-than-market price. Conversely, options are out-of-the-money when they have no intrinsic value—calls with a strike price above the stock price, or puts with a strike price below it. These are cheaper to buy but riskier to hold.
An option is considered at-the-money when the stock price is very close to the strike price. These options typically have the highest time value and are highly sensitive to changes in the stock’s movement. Understanding where your option stands in relation to the stock price helps in choosing the right strategy—ITM options cost more but are safer, OTM options are cheaper but more speculative, and ATM options are ideal for quick directional moves.