Generally, options trading represents buying and selling options contracts on the stock exchanges. In simple terms, it’s very similar to stock trading. An option’s value which refers to premium fluctuates based on the price of the underlying assets. The option can be In the Money(ITM), Out of the Money(OTM) or At the Money(ATM). Let’s look at the Difference Between in the Money and Out of the Money Options. Before that, it’s important to know about intrinsic value and time value because without knowing it, one cannot move forward in the options trading.
The Intrinsic value for call option will be the (underlying stock’s price – its call strike price). For the put option, it is the (put strike price – the underlying stock price). Here, ATM(At the money) and OTM (Out of the money) options don’t have any Intrinsic value.
The Time value is known as the Extrinsic value. Time value decreases to zero overtime at the time of expiration of the period. This situation is referred to as Time decay. Options premium depends on expiration time. Options that expire after a longer period of time is more expensive in comparison to those expiring in the current month.
Difference Between In the Money and Out of the Money Options
An In-the-Money call option represents a call which strikes (exercise) price is lower in comparison to the present underlying stocks price. An In-the-Money put refers a put which strikes (exercise) price is higher compared to the present price of the underlying. This means that if investors would exercise an ITM option by buying or selling a stock to offset the exercise, he would get more cash for selling.
An Out-of-the-money call means a call which exercise price (strike price) is higher compared to the present price of the underlying. Thus, the entire premium of an out-of-the-money call option contains an only extrinsic value. So, it is advisable not to exercise an out of the money option, as an investor would generally get a better price if he trades the underlying in the stock market without using the option.
In the Money: It has positive intrinsic value. Calls options which carry low strikes while puts have high strikes.
Out of the Money: Zero intrinsic value with high strikes in calls and low strikes input.