August 13, 2025 • 12 mins
Ever been confused by the terms "in the money," "at the money," and "out of the money" (ITM, ATM, and OTM)? In this episode, we break down these core options trading concepts based on a simple, straightforward article. We'll show you how the relationship between the stock's price and your option's strike price defines these terms and, most importantly, why understanding this difference is absolutely fundamental to your trading.
How has understanding these terms changed your options trading strategy? Share your thoughts with us and don't forget to subscribe for more simple guidance on conservative options trading.
Key Takeaways
- In the money (ITM) options have intrinsic value; for a call, the stock price is higher than the strike, and for a put, the stock price is lower than the strike.
- At the money (ATM) options have zero intrinsic value and are where the strike price is the same as the stock price. They typically have the most extrinsic value, making them highly sensitive to price changes but also subject to rapid time decay.
- Out of the money (OTM) options have zero intrinsic value and are the cheapest, offering the most leverage. For a call, the strike is higher than the stock, and for a put, the strike is lower. They are the riskiest for buyers, as most expire worthless, but a favorite for sellers.
An option’s state (ITM, ATM, OTM) is dynamic and changes as the stock price moves and time passes, constantly impacting its value and risk profile.
"When you look at an option chain, think about which state—ITM, ATM, or OTM—actually aligns with your specific goal for that potential trade."
Timestamped Summary
- 0:45 The core goal: Unpacking ITM, ATM, and OTM
- 1:42 Defining "In the Money" (ITM) and intrinsic value
- 4:05 Explaining "At the Money" (ATM) and extrinsic value
- 7:08 Breaking down "Out of the Money" (OTM) and its characteristics
- 10:29 Why the ITM/ATM/OTM distinction matters for your trading
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Today we're jumping into something really core to
options trading.
Speaker 3 (00:20):
That's right.
We're talking about those terms.
You always see in the money, atthe money out of the money.
Speaker 2 (00:30):
You know, ITM, ATM, OTM, yeah.
What do they actually mean forthe option itself?
Speaker 3 (00:32):
And for you, the trader Exactly.
If you've ever been confused bythat, well, this deep dive is
definitely for you.
Speaker 2 (00:36):
We're basing this on an article, pretty
straightforward one, calledUnderstanding Options In, at and
Out of the money.
It lays things out nicely.
Speaker 3 (00:45):
And our goal here it's to unpack ITM, atm, otm.
Show how they connect theoptions strike price to the
stock's current price.
Speaker 2 (00:53):
And, crucially, why knowing this difference is well
fundamental.
Doesn't matter if you're buyingor selling.
Speaker 3 (00:58):
Absolutely essential knowledge.
Speaker 2 (01:00):
Okay, let's get into it.
Then, before we hit thespecific states ITM, atm, otm we
need to be absolutely clear onthe two key prices involved.
Speaker 3 (01:08):
Right, because everything hinges on the
relationship between these twonumbers.
First, the strike price.
Speaker 2 (01:13):
That's the fixed price in the option contract.
Yeah, the price where theholder can buy a call or sell a
put.
Speaker 3 (01:18):
Exactly Fixed, locked in.
And the second is the stockprice or the underlying assets
price.
Speaker 2 (01:24):
Which is just where the stock is trading right now,
live in the market.
Speaker 3 (01:29):
And the whole ITMAT MOTM thing.
It's just comparing those twothe strike versus the current
stock price.
Speaker 2 (01:36):
It seems simple on the surface.
Speaker 3 (01:37):
It is, but the implications are huge.
Let's start with in the moneyITM.
Speaker 2 (01:42):
Okay, the source defines ITM basically as if
exercising the option right nowwould make you a profit.
We're ignoring the premium costjust for this definition.
Speaker 3 (01:52):
Right.
So for a call option, that's,the right to buy it's ITM when
the stock price is higher thanyour strike price you get to buy
cheaper than market.
Speaker 2 (01:58):
Makes sense and for a put option, the right to sell.
It's the opposite, it's ITM.
When the stock price is lowerthan your strike price, you get
to sell higher than market.
Speaker 3 (02:07):
Let's use the article's examples Stocks
trading at $60.
You hold a call with a $50strike.
Speaker 2 (02:12):
Okay, Stock price $60 is higher than strike $50.
So that call is ITM.
Speaker 3 (02:18):
Precisely, and it's ITM by $10.
That $10 difference, that's itsintrinsic value.
Speaker 2 (02:23):
Ah, okay, the real tangible value it has right now
because of where the stock isrelative to the strike.
Speaker 3 (02:29):
Exactly Same stock at $60, but now you have a put
with a $70 strike.
Speaker 2 (02:33):
Okay, stock price $60 is lower than the strike $70.
So the put is ITM.
Speaker 3 (02:38):
Right again, and also by $10, $70 strike, $60 stock,
that's its intrinsic value.
Speaker 2 (02:45):
Got it, so ITM options have intrinsic value.
Speaker 3 (02:48):
They do, and for buyers that's generally good
right.
The option already has someinherent worth.
Speaker 2 (02:53):
Which is why they tend to be more expensive, I
guess.
Speaker 3 (02:54):
Generally yes.
Speaker 2 (02:55):
Yeah.
Speaker 3 (02:56):
Especially the deeper ITM they go, and the deeper ITM
the more they act like thestock itself.
Speaker 2 (03:00):
Right that delta gets closer to one.
They move almost dollar fordollar with the stock.
Less guesswork on directionneeded.
Maybe more about capturing thatexisting value plus any further
move.
Speaker 3 (03:09):
True.
Now flip side for optionsellers.
Itm options are well, they'reriskier.
Speaker 2 (03:15):
Yeah, I can see why, If you sold that $50 call when
the stock's at $60, you could beforced to sell your shares for
$50 when they're worth $60.
Speaker 3 (03:23):
Ouch, or if you sold the $70 put with the stock at
$60, you might have to buyshares at $70 that you could get
for $60.
Speaker 2 (03:30):
So a much higher chance of being assigned the
stock Definitely.
Speaker 3 (03:33):
Higher probability of assignment usually requires
more capital, more margin heldby your broker.
Speaker 2 (03:38):
The article had a joke about selling naked ITM
calls.
Oh, I think about skydiving.
Speaker 3 (03:43):
Yeah, like selling an in the money naked call.
It's a bit like volunteering tocatch a falling knife Possible,
you won't get hurt.
But why risk it unless youabsolutely have to or you know
you have a very specificstrategy, like already owning
the stock for a covered call.
Speaker 2 (03:58):
Okay, paints a picture.
So that's.
Itm has intrinsic value.
Now, what about when there's nointrinsic value right now at
the money?
Speaker 3 (04:05):
At the money ATM.
This is super simpleconceptually.
The strike price is basicallythe same as the current stock
price, or very, very close.
Speaker 2 (04:13):
Stocks are $50.
The strike is $50.
Call or put.
That's ATM.
Speaker 3 (04:16):
Exactly, and the key thing here ATM options have zero
intrinsic value.
Their price is all extrinsicvalue.
Speaker 2 (04:24):
Extrinsic value, that's the time value right,
Based on how much time is left,how jumpy the stock might be.
Speaker 3 (04:29):
Time to expiration implied volatility.
That's the market's guess aboutfuture swings, often called
vega and just general marketexpectations.
It's the premium for thepossibility of the option
becoming ITM later.
Speaker 2 (04:41):
And, interestingly, atm options usually have the
most extrinsic value, right yeah, compared to ITM or OTM for the
same expiration.
Speaker 3 (04:48):
That's typically the case.
It's where the uncertainty ishighest.
You could say the stock onlyneeds a small nudge to become
ITM in either direction.
Speaker 2 (04:56):
So they're really sensitive to price changes.
Speaker 3 (04:58):
Very sensitive.
We talk about high gamma forATM options.
That means their delta, howmuch the option price changes
for a $1 stock move can changevery quickly if the stock starts
moving.
Speaker 2 (05:09):
Ah, okay, so for buyers, atm might be attractive
if you expect a big, fast move.
Often, yes, they're cheaperthan ATM options, give you
leverage and react quickly.
Speaker 3 (05:21):
But there's a patch Time decay, theta Exactly.
Since their value is allextrinsic, they are losing value
every single day due to timedecay, and ATM options lose it
fastest If the stock just sitsthere.
That premium melts away.
Speaker 2 (05:33):
The article compares it to a gym membership.
Speaker 3 (05:35):
Huh, yeah, you pay for the potential to get fit,
but if you don't actually showup and work out, if the stock
doesn't move, you're just losingmoney as time ticks by.
Speaker 2 (05:43):
It's a bit close to home.
So for buyers, high sensitivitypotential for big games if it
moves, but theta risk issignificant Precisely.
Speaker 3 (05:53):
For sellers, though, ATM options offer the highest
premium up front.
Speaker 2 (05:57):
Because of all that extrinsic value.
Speaker 3 (05:59):
Right.
So it's tempting to sell themto collect that premium.
Speaker 2 (06:02):
But the risk is high too, isn't it?
A small move makes it ITMagainst you pretty fast.
Speaker 3 (06:06):
Absolutely High directional risk.
Sellers often use ATM optionsand strategies where they bet
the stock won't move, much likeshort straddles or iron condors.
Speaker 1 (06:18):
They hope to profit from that time, decay and maybe
volatility dropping.
Most investors are told toaccept risk, ride the market and
cross their fingers.
But what if you could beat themarket while spending less than
two hours per month on yourtrades?
That's exactly what you'lllearn in a free training at
weloveoptionscom slash passivetrading.
You'll discover a provenlow-risk trading strategy, a
(06:40):
simple way to find winningstocks without research overload
.
How to stay profitable withoutdaily screen time.
Plus, you'll get a bonus thesynthetic annuity showing how to
earn cash flow even from losingpositions.
Go to weloveoptionscom slashpassive trading and register
your spot now.
Speaker 2 (07:00):
Okay, ITM has intrinsic ATM, has max,
extrinsic, high sensitivity,high decay.
That leaves out of the moneyOTM.
Speaker 3 (07:08):
OTM.
This means exercising theoption right now would be a
losing proposition.
It wouldn't make sense, basedpurely on strike versus stock
price.
Speaker 2 (07:16):
So for a call.
The strike price is higher thanthe current stock price.
Like stocks at $40, strikes at$50.
Speaker 3 (07:22):
Correct.
You wouldn't exercise yourright to buy at $50 when the
market price is $40.
Speaker 2 (07:27):
And for a put the strike price is lower than the
stock price.
Stock at $40, put strike at $30.
Speaker 3 (07:33):
Yep, you wouldn't exercise your right to sell at
$30 when you could sell for $40in the market.
Speaker 2 (07:38):
So, just like ATM options, otm options have zero
intrinsic value.
Speaker 3 (07:43):
Correct their entire price.
Whatever it is, is pureextrinsic value.
It's payment for the chance,however small, that the stock
might move enough beforeexpiration to make it ITM.
Speaker 2 (07:54):
Now for buyers.
The big appeal of OTM optionsis they're cheap.
Speaker 3 (07:58):
They're the cheapest, yeah, and because they're cheap
, they offer the most leverage.
A small amount of moneycontrols the potential outcome
of 100 shares If the stock makesa massive unexpected move in
your favor.
Speaker 2 (08:10):
The payoff can be huge percentages.
Speaker 3 (08:12):
Potentially yes, but and it's a big but- they're the
riskiest.
By far Most OTM options expireworthless.
The further OTM they are or theless time they have left, the
lower the probability they'llever become profitable.
Speaker 2 (08:26):
So buyers use them for what Speculation Hail Mary
plays or maybe cheap hedgingsometimes.
Speaker 3 (08:30):
All of the above.
High risk speculation is common.
You accept the high likelihoodof losing your premium for that
small chance of a massive return, sometimes used for hedging
disaster scenarios too, becausethe cost is low.
Speaker 2 (08:44):
The lottery ticket analogy often comes up here.
Speaker 3 (08:46):
It fits pretty well Low cost, very low probability,
but a huge jackpot if you winNow.
For sellers, otm options areoften the bread and butter.
Speaker 2 (08:56):
Ah, because the odds are high, they will expire
worthless.
Speaker 3 (08:58):
Exactly.
Sellers collect the premium upfront and since the probability
of the option ending up ITM islower, they have a higher
statistical chance of keepingthat premium as profit.
Speaker 2 (09:08):
That's where strategies like selling OTM puts
for income or selling OTMcovered calls against stock you
own come in.
Speaker 3 (09:15):
Precisely, you're playing the probabilities,
trying to collect theta decay.
Speaker 2 (09:18):
But it's not zero risk for the seller, right yeah,
the source mentions riskmanagement is still key.
Speaker 3 (09:24):
Absolutely not zero risk.
Speaker 1 (09:27):
According to the CBOE , there are over 3,700
optionable stocks out there, butnot all of them are worth
trading.
What most new options tradersdo not realize is that choosing
the right stock is 50% of thebattle.
That's why we created myultimate watch list, a free list
of the top 144 stocks foroptions traders.
Every stock passed multipletests for liquidity, volume,
(09:49):
strike depth and premium quality.
Get it now free atweloveoptionscom.
Slash stocks list.
It's our personal list and nowit can be yours.
Speaker 3 (09:59):
While the probability of any single OTM option
causing a loss might be low, asudden sharp adverse move in the
stock can happen and if it does, an OTM option can suddenly
become ITM and the potentialloss for the seller can be
substantial, especially on nakedoptions.
So managing position size andoverall risk is crucial.
Speaker 2 (10:18):
Right, you're betting against the long shot, but the
long shot sometimes comes in.
You have to be prepared for it.
Okay, let's pull this alltogether then.
Why does this ITM, atm, otmdistinction matter so much day
to day?
Speaker 3 (10:29):
Because it fundamentally defines the
options characteristics, itsvalue, composition, intrinsic
versus extrinsic, dictates itsprice behavior, its sensitivity
to stock moves and time decay,and the probabilities involved.
So quick recap ITM means stockstrike, atm means stock strike,
otm means stock strike.
Speaker 2 (10:45):
And for puts ITM means stock strike, atm means
stock strike, otm means stockstrike.
Speaker 3 (10:50):
And the value ITM has intrinsic value.
Atm is all extrinsic mostsensitive, fastest decay.
Otm is all extrinsic cheapest.
Highest leverage for buyers,highest probability of expiring
worthless for sellers.
Speaker 2 (11:03):
Knowing which state an option is in tells you what
you're actually trading.
Are you trading existing value?
Are you trading time andvolatility?
Are you trading a lowprobability outcome?
Speaker 3 (11:13):
It impacts your strategy choice, your risk
assessment, your potentialreward, basically everything.
Speaker 2 (11:19):
Think about it from the buyer's perspective.
Do you want the higherprobability but higher cost of
IPM, the sensitivity and decayrisk of APM, or the low cost?
Low probability, high leverageof OTM.
Speaker 3 (11:31):
And for sellers are you taking assignment risk with
ITM, high directional risk withATM for higher premium or
playing the probabilities withOTM for lower premium but maybe
better odds?
Speaker 2 (11:43):
Understanding this helps you align your trades with
your market view and risktolerance.
Or playing the probabilitieswith OTM for lower premium but
maybe better odds.
Understanding this helps youalign your trades with your
market view and risk tolerance.
It helps avoid nasty surprisesnear expiration when, say, an
OTM option suddenly raises ITMor an ATM option's value
evaporates due to theta.
Speaker 3 (11:55):
And it's dynamic right.
An option state isn't fixed.
Speaker 2 (11:58):
Not at all.
As the stock price moves,options constantly shift between
OPM, ATM and ITM, and timepassing always works against the
extrinsic value component.
Speaker 3 (12:06):
So here's a thought to leave you with when you look
at an option chain, think aboutwhich state ITM, atm or OTM
actually aligns with yourspecific goal for that potential
trade.
Are you buying for leverage,selling for income Hedging?
Speaker 2 (12:21):
And how might that state change?
If the stock moves up $5 ordown $5, or if a week passes,
what happens to your optionscharacteristics then?
Speaker 3 (12:30):
Understanding that dynamic is key that's the deeper
level, beyond just thedefinitions.
Definitely All right.
That wraps up our deep diveinto in the money, at the money
and out of the money.
Thanks for joining us.
Speaker 2 (12:41):
This is an AI podcast based on educational material
from Option Genius.
Visit us today atoptiongeniuscom.
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Today we're jumping into something really core to
options trading.
Speaker 3 (00:20):
That's right.
We're talking about those terms.
You always see in the money, atthe money out of the money.
Speaker 2 (00:30):
You know, ITM, ATM, OTM, yeah.
What do they actually mean forthe option itself?
Speaker 3 (00:32):
And for you, the trader Exactly.
If you've ever been confused bythat, well, this deep dive is
definitely for you.
Speaker 2 (00:36):
We're basing this on an article, pretty
straightforward one, calledUnderstanding Options In, at and
Out of the money.
It lays things out nicely.
Speaker 3 (00:45):
And our goal here it's to unpack ITM, atm, otm.
Show how they connect theoptions strike price to the
stock's current price.
Speaker 2 (00:53):
And, crucially, why knowing this difference is well
fundamental.
Doesn't matter if you're buyingor selling.
Speaker 3 (00:58):
Absolutely essential knowledge.
Speaker 2 (01:00):
Okay, let's get into it.
Then, before we hit thespecific states ITM, atm, otm we
need to be absolutely clear onthe two key prices involved.
Speaker 3 (01:08):
Right, because everything hinges on the
relationship between these twonumbers.
First, the strike price.
Speaker 2 (01:13):
That's the fixed price in the option contract.
Yeah, the price where theholder can buy a call or sell a
put.
Speaker 3 (01:18):
Exactly Fixed, locked in.
And the second is the stockprice or the underlying assets
price.
Speaker 2 (01:24):
Which is just where the stock is trading right now,
live in the market.
Speaker 3 (01:29):
And the whole ITMAT MOTM thing.
It's just comparing those twothe strike versus the current
stock price.
Speaker 2 (01:36):
It seems simple on the surface.
Speaker 3 (01:37):
It is, but the implications are huge.
Let's start with in the moneyITM.
Speaker 2 (01:42):
Okay, the source defines ITM basically as if
exercising the option right nowwould make you a profit.
We're ignoring the premium costjust for this definition.
Speaker 3 (01:52):
Right.
So for a call option, that's,the right to buy it's ITM when
the stock price is higher thanyour strike price you get to buy
cheaper than market.
Speaker 2 (01:58):
Makes sense and for a put option, the right to sell.
It's the opposite, it's ITM.
When the stock price is lowerthan your strike price, you get
to sell higher than market.
Speaker 3 (02:07):
Let's use the article's examples Stocks
trading at $60.
You hold a call with a $50strike.
Speaker 2 (02:12):
Okay, Stock price $60 is higher than strike $50.
So that call is ITM.
Speaker 3 (02:18):
Precisely, and it's ITM by $10.
That $10 difference, that's itsintrinsic value.
Speaker 2 (02:23):
Ah, okay, the real tangible value it has right now
because of where the stock isrelative to the strike.
Speaker 3 (02:29):
Exactly Same stock at $60, but now you have a put
with a $70 strike.
Speaker 2 (02:33):
Okay, stock price $60 is lower than the strike $70.
So the put is ITM.
Speaker 3 (02:38):
Right again, and also by $10, $70 strike, $60 stock,
that's its intrinsic value.
Speaker 2 (02:45):
Got it, so ITM options have intrinsic value.
Speaker 3 (02:48):
They do, and for buyers that's generally good
right.
The option already has someinherent worth.
Speaker 2 (02:53):
Which is why they tend to be more expensive, I
guess.
Speaker 3 (02:54):
Generally yes.
Speaker 2 (02:55):
Yeah.
Speaker 3 (02:56):
Especially the deeper ITM they go, and the deeper ITM
the more they act like thestock itself.
Speaker 2 (03:00):
Right that delta gets closer to one.
They move almost dollar fordollar with the stock.
Less guesswork on directionneeded.
Maybe more about capturing thatexisting value plus any further
move.
Speaker 3 (03:09):
True.
Now flip side for optionsellers.
Itm options are well, they'reriskier.
Speaker 2 (03:15):
Yeah, I can see why, If you sold that $50 call when
the stock's at $60, you could beforced to sell your shares for
$50 when they're worth $60.
Speaker 3 (03:23):
Ouch, or if you sold the $70 put with the stock at
$60, you might have to buyshares at $70 that you could get
for $60.
Speaker 2 (03:30):
So a much higher chance of being assigned the
stock Definitely.
Speaker 3 (03:33):
Higher probability of assignment usually requires
more capital, more margin heldby your broker.
Speaker 2 (03:38):
The article had a joke about selling naked ITM
calls.
Oh, I think about skydiving.
Speaker 3 (03:43):
Yeah, like selling an in the money naked call.
It's a bit like volunteering tocatch a falling knife Possible,
you won't get hurt.
But why risk it unless youabsolutely have to or you know
you have a very specificstrategy, like already owning
the stock for a covered call.
Speaker 2 (03:58):
Okay, paints a picture.
So that's.
Itm has intrinsic value.
Now, what about when there's nointrinsic value right now at
the money?
Speaker 3 (04:05):
At the money ATM.
This is super simpleconceptually.
The strike price is basicallythe same as the current stock
price, or very, very close.
Speaker 2 (04:13):
Stocks are $50.
The strike is $50.
Call or put.
That's ATM.
Speaker 3 (04:16):
Exactly, and the key thing here ATM options have zero
intrinsic value.
Their price is all extrinsicvalue.
Speaker 2 (04:24):
Extrinsic value, that's the time value right,
Based on how much time is left,how jumpy the stock might be.
Speaker 3 (04:29):
Time to expiration implied volatility.
That's the market's guess aboutfuture swings, often called
vega and just general marketexpectations.
It's the premium for thepossibility of the option
becoming ITM later.
Speaker 2 (04:41):
And, interestingly, atm options usually have the
most extrinsic value, right yeah, compared to ITM or OTM for the
same expiration.
Speaker 3 (04:48):
That's typically the case.
It's where the uncertainty ishighest.
You could say the stock onlyneeds a small nudge to become
ITM in either direction.
Speaker 2 (04:56):
So they're really sensitive to price changes.
Speaker 3 (04:58):
Very sensitive.
We talk about high gamma forATM options.
That means their delta, howmuch the option price changes
for a $1 stock move can changevery quickly if the stock starts
moving.
Speaker 2 (05:09):
Ah, okay, so for buyers, atm might be attractive
if you expect a big, fast move.
Often, yes, they're cheaperthan ATM options, give you
leverage and react quickly.
Speaker 3 (05:21):
But there's a patch Time decay, theta Exactly.
Since their value is allextrinsic, they are losing value
every single day due to timedecay, and ATM options lose it
fastest If the stock just sitsthere.
That premium melts away.
Speaker 2 (05:33):
The article compares it to a gym membership.
Speaker 3 (05:35):
Huh, yeah, you pay for the potential to get fit,
but if you don't actually showup and work out, if the stock
doesn't move, you're just losingmoney as time ticks by.
Speaker 2 (05:43):
It's a bit close to home.
So for buyers, high sensitivitypotential for big games if it
moves, but theta risk issignificant Precisely.
Speaker 3 (05:53):
For sellers, though, ATM options offer the highest
premium up front.
Speaker 2 (05:57):
Because of all that extrinsic value.
Speaker 3 (05:59):
Right.
So it's tempting to sell themto collect that premium.
Speaker 2 (06:02):
But the risk is high too, isn't it?
A small move makes it ITMagainst you pretty fast.
Speaker 3 (06:06):
Absolutely High directional risk.
Sellers often use ATM optionsand strategies where they bet
the stock won't move, much likeshort straddles or iron condors.
Speaker 1 (06:18):
They hope to profit from that time, decay and maybe
volatility dropping.
Most investors are told toaccept risk, ride the market and
cross their fingers.
But what if you could beat themarket while spending less than
two hours per month on yourtrades?
That's exactly what you'lllearn in a free training at
weloveoptionscom slash passivetrading.
You'll discover a provenlow-risk trading strategy, a
(06:40):
simple way to find winningstocks without research overload
.
How to stay profitable withoutdaily screen time.
Plus, you'll get a bonus thesynthetic annuity showing how to
earn cash flow even from losingpositions.
Go to weloveoptionscom slashpassive trading and register
your spot now.
Speaker 2 (07:00):
Okay, ITM has intrinsic ATM, has max,
extrinsic, high sensitivity,high decay.
That leaves out of the moneyOTM.
Speaker 3 (07:08):
OTM.
This means exercising theoption right now would be a
losing proposition.
It wouldn't make sense, basedpurely on strike versus stock
price.
Speaker 2 (07:16):
So for a call.
The strike price is higher thanthe current stock price.
Like stocks at $40, strikes at$50.
Speaker 3 (07:22):
Correct.
You wouldn't exercise yourright to buy at $50 when the
market price is $40.
Speaker 2 (07:27):
And for a put the strike price is lower than the
stock price.
Stock at $40, put strike at $30.
Speaker 3 (07:33):
Yep, you wouldn't exercise your right to sell at
$30 when you could sell for $40in the market.
Speaker 2 (07:38):
So, just like ATM options, otm options have zero
intrinsic value.
Speaker 3 (07:43):
Correct their entire price.
Whatever it is, is pureextrinsic value.
It's payment for the chance,however small, that the stock
might move enough beforeexpiration to make it ITM.
Speaker 2 (07:54):
Now for buyers.
The big appeal of OTM optionsis they're cheap.
Speaker 3 (07:58):
They're the cheapest, yeah, and because they're cheap
, they offer the most leverage.
A small amount of moneycontrols the potential outcome
of 100 shares If the stock makesa massive unexpected move in
your favor.
Speaker 2 (08:10):
The payoff can be huge percentages.
Speaker 3 (08:12):
Potentially yes, but and it's a big but- they're the
riskiest.
By far Most OTM options expireworthless.
The further OTM they are or theless time they have left, the
lower the probability they'llever become profitable.
Speaker 2 (08:26):
So buyers use them for what Speculation Hail Mary
plays or maybe cheap hedgingsometimes.
Speaker 3 (08:30):
All of the above.
High risk speculation is common.
You accept the high likelihoodof losing your premium for that
small chance of a massive return, sometimes used for hedging
disaster scenarios too, becausethe cost is low.
Speaker 2 (08:44):
The lottery ticket analogy often comes up here.
Speaker 3 (08:46):
It fits pretty well Low cost, very low probability,
but a huge jackpot if you winNow.
For sellers, otm options areoften the bread and butter.
Speaker 2 (08:56):
Ah, because the odds are high, they will expire
worthless.
Speaker 3 (08:58):
Exactly.
Sellers collect the premium upfront and since the probability
of the option ending up ITM islower, they have a higher
statistical chance of keepingthat premium as profit.
Speaker 2 (09:08):
That's where strategies like selling OTM puts
for income or selling OTMcovered calls against stock you
own come in.
Speaker 3 (09:15):
Precisely, you're playing the probabilities,
trying to collect theta decay.
Speaker 2 (09:18):
But it's not zero risk for the seller, right yeah,
the source mentions riskmanagement is still key.
Speaker 3 (09:24):
Absolutely not zero risk.
Speaker 1 (09:27):
According to the CBOE , there are over 3,700
optionable stocks out there, butnot all of them are worth
trading.
What most new options tradersdo not realize is that choosing
the right stock is 50% of thebattle.
That's why we created myultimate watch list, a free list
of the top 144 stocks foroptions traders.
Every stock passed multipletests for liquidity, volume,
(09:49):
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Speaker 3 (09:59):
While the probability of any single OTM option
causing a loss might be low, asudden sharp adverse move in the
stock can happen and if it does, an OTM option can suddenly
become ITM and the potentialloss for the seller can be
substantial, especially on nakedoptions.
So managing position size andoverall risk is crucial.
Speaker 2 (10:18):
Right, you're betting against the long shot, but the
long shot sometimes comes in.
You have to be prepared for it.
Okay, let's pull this alltogether then.
Why does this ITM, atm, otmdistinction matter so much day
to day?
Speaker 3 (10:29):
Because it fundamentally defines the
options characteristics, itsvalue, composition, intrinsic
versus extrinsic, dictates itsprice behavior, its sensitivity
to stock moves and time decay,and the probabilities involved.
So quick recap ITM means stockstrike, atm means stock strike,
otm means stock strike.
Speaker 2 (10:45):
And for puts ITM means stock strike, atm means
stock strike, otm means stockstrike.
Speaker 3 (10:50):
And the value ITM has intrinsic value.
Atm is all extrinsic mostsensitive, fastest decay.
Otm is all extrinsic cheapest.
Highest leverage for buyers,highest probability of expiring
worthless for sellers.
Speaker 2 (11:03):
Knowing which state an option is in tells you what
you're actually trading.
Are you trading existing value?
Are you trading time andvolatility?
Are you trading a lowprobability outcome?
Speaker 3 (11:13):
It impacts your strategy choice, your risk
assessment, your potentialreward, basically everything.
Speaker 2 (11:19):
Think about it from the buyer's perspective.
Do you want the higherprobability but higher cost of
IPM, the sensitivity and decayrisk of APM, or the low cost?
Low probability, high leverageof OTM.
Speaker 3 (11:31):
And for sellers are you taking assignment risk with
ITM, high directional risk withATM for higher premium or
playing the probabilities withOTM for lower premium but maybe
better odds?
Speaker 2 (11:43):
Understanding this helps you align your trades with
your market view and risktolerance.
Or playing the probabilitieswith OTM for lower premium but
maybe better odds.
Understanding this helps youalign your trades with your
market view and risk tolerance.
It helps avoid nasty surprisesnear expiration when, say, an
OTM option suddenly raises ITMor an ATM option's value
evaporates due to theta.
Speaker 3 (11:55):
And it's dynamic right.
An option state isn't fixed.
Speaker 2 (11:58):
Not at all.
As the stock price moves,options constantly shift between
OPM, ATM and ITM, and timepassing always works against the
extrinsic value component.
Speaker 3 (12:06):
So here's a thought to leave you with when you look
at an option chain, think aboutwhich state ITM, atm or OTM
actually aligns with yourspecific goal for that potential
trade.
Are you buying for leverage,selling for income Hedging?
Speaker 2 (12:21):
And how might that state change?
If the stock moves up $5 ordown $5, or if a week passes,
what happens to your optionscharacteristics then?
Speaker 3 (12:30):
Understanding that dynamic is key that's the deeper
level, beyond just thedefinitions.
Definitely All right.
That wraps up our deep diveinto in the money, at the money
and out of the money.
Thanks for joining us.
Speaker 2 (12:41):
This is an AI podcast based on educational material
from Option Genius.
Visit us today atoptiongeniuscom.
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