It is useful when discussing options to be able to describe where the strike price of a particular option is relative to the current price of the asset. To facilitate this, there are 3 acronyms that are commonly used.

These are:

– ITM – In the money

– ATM – At the money

– OTM – Out of the money

For call options, when:

Strike Price < Current Asset Price, the option is in the money

Strike Price = Current Asset Price, the option is at the money

Strike Price > Current Asset Price, the option is out of the money

For put options, when:

Strike Price < Current Asset Price, the option is out of the money

Strike Price = Current Asset Price, the option is at the money

Strike Price > Current Asset Price, the option is in the money

For example, if bitcoin is currently trading at a price of $35,000, we could use these three acronyms (ITM, ATM, and OTM) to describe both puts and calls as shown in this table:

Underlying bitcoin price currently: $35,000
Strike PriceCallsPuts
25,000ITMOTM
30,000ITMOTM
35,000ATMATM
40,000OTMITM
45,000OTMITM

With the bitcoin price at $35,000, the $35,000 call and the $35,000 put are both at the money. For any strike price below the current bitcoin price, calls are in the money, and puts are out of the money. For any strike price above the current bitcoin price, calls are out of the money, and puts are in the money.

Now let’s assume the price of bitcoin increases from $35,000 to $40,000. The table can be updated like so.

Underlying bitcoin price currently: $40,000
Strike PriceCallsPuts
25,000ITMOTM
30,000ITMOTM
35,000ITMOTM
40,000ATMATM
45,000OTMITM

With the price of bitcoin now at $40,000, the $40,000 call and the $40,000 put are both at the money. For any strike price below the current bitcoin price, calls are in the money, and puts are out of the money. This now includes the options with a strike price of $35,000, because the bitcoin price is now above this strike price. For any strike price above the current bitcoin  price, calls are out of the money, and puts are in the money. This is now just the $45,000 strike options.

In both of these examples you may have noticed that I’ve conveniently picked an underlying price that falls precisely on one of the strike prices, which will not usually be the case. In practice, where the underlying price is likely to be between two strikes, it is common to describe the strike closest to the money as at the money. For example, if the price of bitcoin had actually increased to $39,800 instead of $40,000, most traders would still describe the $40,000 options as ATM in this example.

ITM visuals in option chains

It is common for option chains to have some sort of visual to make it easier to see where the option strikes are in relation to the current price.

Tastyworks have an orange line that spans the option chain indicating where the current price is. Interactive Brokers highlight the ITM options blue. And Deribit highlights the ITM options with a green background.

Outro

ITM options would have a value if exercised immediately. OTM options would not have any value if exercised immediately. An option that is precisely ATM would also not have any value if exercised immediately. 

The value that the ITM options have that the others lack, is called intrinsic value. All three have something called extrinsic value though. It is these two types of value, intrinsic and extrinsic, that we will cover in the next lecture.