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Out of the Money In the Money vs. Out of the Money: An Overview In options trading, the difference between "in the money" ITM and "out of the money" OTM is a matter of the strike price's position relative to the market value of the underlying stock, called its moneyness. Key Takeaways In options trading, the difference between "in the money" ITM and "out of the money" OTM is a matter of the strike price's position relative to the market value of the underlying stock, called its moneyness.
OTM options are more commonly traded for strategies such as covered calls or protective puts. In the Money ITM options have their uses.
For example, a trader may want to hedge or partially hedge their position. They may also want to buy an option that has some intrinsic value, and not just time value.
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That is not to say ITM option won't have large price moves, they can and do, but, compared to OTM options, the percentage moves are smaller. One is not better than another; it just comes down to what works for the best for the strategy in question.
Calls A call option gives the option buyer the right to buy shares at the strike price if it is beneficial to do so. An in the money call option, therefore, is one that has a strike price lower than the current stock price.
Puts Put options are purchased by traders who believe the stock price will go down.
ITM put options, therefore, are those that have strike prices above the current stock price. In the money options carry a higher premium than out of the money options, because of the time value issue discussed above. Out of the Money In the money or out of the money options both have their pros and cons.
These options will have a delta of less than
One is not better than the other. Although, trading on a shoe-string budget is not advised. Some of the uses for OTM options include buying the options if you expect a big move in the stock.
The flip side is that these options can move against you very quickly as well, though the risk is limited to the amount paid for the option assuming you are the option buyer and not the option writer. Compare Accounts.
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