Moneyness is the relationship between the stock price and the option's strike. It decides whether an option already has real value — and how much of its premium is pure time.
The three states
| State | Call | Put |
|---|---|---|
| In the money (ITM) | Stock above strike | Stock below strike |
| At the money (ATM) | Stock roughly equal to strike | |
| Out of the money (OTM) | Stock below strike | Stock above strike |
Intrinsic value vs. time value
Every premium is the sum of two parts:
- Intrinsic value — the amount it is already in the money (never below zero).
- Time value — everything left over: what buyers pay for the chance it moves further before expiry.
Example: with the stock at $53, a $50 call trading for $4 holds $3 of intrinsic value ($53 − $50) and $1 of time value. An OTM option has zero intrinsic value — its premium is all time value, which decays to nothing by expiration.
