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Moneyness, Intrinsic & Time Value
Strike and moneyness
The strike price is the fixed price at which the option can be exercised. Moneyness is the relative position of the underlying's current price versus the strike:
- ITM (in the money) — exercising now would have positive value (call: spot > strike; put: spot < strike)
- ATM (at the money) — spot ≈ strike
- OTM (out of the money) — exercising now would be worthless
Premium = intrinsic value + time value
- Intrinsic value — what the option is worth if exercised immediately (max(0, spot − strike) for calls; max(0, strike − spot) for puts). OTM options have zero intrinsic value.
- Time value (extrinsic value) — everything above intrinsic: the market's payment for remaining optionality. It is largest ATM, grows with time to expiry and volatility, and decays to zero at expiration (theta decay — greeks).
Expiration horizon
Most listed options run weeks to months; LEAPS (Long-term Equity AnticiPation Securities) extend listed expirations out a year or more, trading more like stock substitutes with slower decay.
What happens at the deadline: exercise-assignment-and-clearing. How time value is priced: pricing-models.