In, At, Out of the Money
Where your contract sits relative to the stock — and what it means for payoff.
Say SPY's at $560. You buy a $555 call. That's in the money (ITM) — the stock is already above your strike, so your contract has intrinsic value ($5 per share, or $500 per contract). You're paying for that head start.
Now say you buy a $560 call instead. That's at the money (ATM) — strike equals stock price. No intrinsic value yet, all premium. The most sensitive to moves in either direction.
Or you buy a $565 call. That's out of the money (OTM) — the stock needs to climb above $565 before your contract has any intrinsic value. Cheaper up front, higher risk, bigger percentage gains if it runs.
ITM = already winning, costs more. ATM = on the line, maximum leverage. OTM = lotto ticket, needs the stock to move your way before it pays. Same logic flips for puts — ITM put has a strike above the stock, OTM put has a strike below.
The closer you get to expiration, the faster OTM contracts lose value if the stock doesn't move. That's why 0DTE OTM plays either print huge or go to zero — there's no time left to be wrong.