ITM vs OTM Options: Cost, Probability & Examples: A Quick Guide

The $170 call costs $1,700 but has a 70% chance of profit. The $200 call costs $150 but expires worthless 80% of the time. Cheap options aren't a bargain — here's why.

Apple is trading at $185. You are bullish and want to buy a call option expiring in 45 days. The options chain shows three choices:

$170 call (ITM — $15 in the money)
- Premium: $17.00 per share ($1,700 per contract)
- Intrinsic value: $15.00
- Time value: $2.00
- Delta: 0.82
- Breakeven at expiration: $187.00

$185 call (ATM — at the money)
- Premium: $5.00 per share ($500 per contract)
- Intrinsic value: $0
- Time value: $5.00
- Delta: 0.50
- Breakeven at expiration: $190.00

$200 call (OTM — $15 out of the money)
- Premium: $1.50 per share ($150 per contract)
- Intrinsic value: $0
- Time value: $1.50
- Delta: 0.18
- Breakeven at expiration: $201.50

The ITM call costs 11× more than the OTM call. But it has a breakeven just $2 above the current price versus $16.50 for the OTM call. That gap is the core tradeoff between moneyness levels — and the scenario table below shows exactly what happens to each option across three outcomes.

The diagram below illustrates how moneyness creates these cost and probability differences at a glance.

The table below shows the value of each option at expiration across three scenarios: Apple rallies to $200 (+8.1%), stays flat at $185, or drops to $170 (-8.1%). Dollar amounts are per contract (100 shares). Past performance does not indicate future results.

Notice the pattern: the ITM call produces the largest dollar profit when Apple rallies ($1,300) but the smallest percentage gain (76%). The OTM call produces the smallest dollar profit if Apple only reaches $200 — it barely breaks even at $201.50 — and it is a total loss in two of the three scenarios. The ATM call sits in the middle on every metric.

This is not a coincidence. It is the fundamental tradeoff of moneyness: cheap options feel like a deal, but they need a big move to pay off. Expensive options cost more upfront but start closer to profitability.

The OTM call in this example needs Apple to rise 8.9% just to break even. Historically, most OTM options — some estimates put it above 80% — expire worthless. That $150 feels small until you lose it five times in a row.

Moneyness describes the relationship between an option's strike price and the current stock price. It answers one question: if you exercised the option right now, would it have value?

- In the money (ITM): The option has intrinsic value. A call is ITM when the stock is above the strike. A put is ITM when the stock is below the strike.
- At the money (ATM): The stock price equals (or nearly equals) the strike. No intrinsic value, but maximum time value.
- Out of the money (OTM): No intrinsic value. A call is OTM when the stock is below the strike. A put is OTM when the stock is above the strike.

Moneyness is not permanent. It shifts every time the stock price moves.

A call that is OTM today can become ITM tomorrow if the stock rallies past the strike. The reverse is equally true.

As the stock moves through the ATM zone, gamma causes delta to change rapidly — a concept that becomes critical near expiration. For a broader introduction, see What Is Options Trading?.

The moneyness of an option has cascading effects on cost, risk, and return potential. The table below compares ITM, ATM, and OTM options across the dimensions that matter most.

Premium cost: ITM options are the most expensive because they include intrinsic value. OTM options are the cheapest. ATM options fall in between.

Probability of profit: ITM options have the highest probability of expiring with value (roughly 60-90%). OTM options have the lowest (roughly 10-40%). Delta provides a rough estimate — an option with a delta of 0.70 has approximately a 70% chance of finishing ITM.

Percentage return potential: OTM options offer the highest percentage returns when they work. A $1.50 option that becomes worth $7.50 is a 400% gain. A $17 option that becomes worth $23 is only a 35% gain — even though the dollar profit is larger.

Time decay (theta): ATM options lose the most time value per day because they have the most time value to begin with. Deep ITM and deep OTM options have less time value exposure.

No single moneyness level is universally "correct." Each represents a different balance of cost and probability. The right choice depends on conviction, time horizon, and capital allocation.

Cheap OTM options feel like a deal — and that is exactly why they are dangerous for beginners. A $1.50 option on a $185 stock seems like a low-risk way to participate in a move. But the math works against you in two ways.

First, the breakeven is far away. The $200 call in our Apple example needs the stock to rise 8.9% ($185 to $201.50) just to break even. That is a large move for a 45-day window. Most stocks do not move that much in a month and a half.

Second, delta is low. With a delta of 0.18, the option gains only $0.18 for every $1 Apple moves up. If Apple rallies $5 (from $185 to $190), the OTM call gains roughly $0.90 — minus time decay. Meanwhile the ATM call with a delta of 0.50 gains $2.50 minus decay. The ITM call with a delta of 0.82 gains $4.10 minus decay.

The further out of the money an option is, the less responsive it is to stock moves and the lower its probability of profit. This is why experienced traders say: the cheapest option on the chain is almost never the best value. The premium is low because the probability is low.

OTM options are not useless — they work well in spread strategies where you sell one OTM option to offset the cost of another, and they can produce outsized returns on rare large moves. But buying naked OTM calls and puts as a default strategy is one of the fastest ways to erode capital. For more on how option pricing reflects these probabilities, see What Is an Options Premium?.

ITM options are more expensive but more forgiving. They have intrinsic value and a higher delta, meaning they move more closely with the stock. Investors who want stock-like exposure with defined risk often choose ITM options.

OTM options are cheap but have low probability. They only pay off if the stock makes a significant move. They are commonly used for high-conviction short-term trades or as legs in multi-option strategies like spreads.

ATM options have the highest time value. This makes them the most sensitive to theta decay. Option sellers often target ATM strikes to maximize the premium collected.

Moneyness is not static. As the stock price moves, your ITM option can become ATM or even OTM. Monitoring how moneyness shifts — and how delta and gamma change as a result — helps you make better decisions about when to close, hold, or roll.

Moneyness is one of the foundational concepts in options. Once you understand how ITM, ATM, and OTM options differ, you can make more deliberate choices about which contracts to trade.

- What Is a Strike Price? — How the strike price creates the moneyness distinction and how to evaluate different strike selections.
- What Is an Options Premium? — How intrinsic value and time value combine to form the total premium.
- What Is a Call Option? and What Is a Put Option? — How moneyness applies differently to calls versus puts.
- What Is Theta Decay? — How time decay affects ITM, ATM, and OTM options differently.
- Strike Price and Expiration — How strike price and expiration interact to determine an option's behavior.

Options involve substantial risk. Understanding moneyness is an important step, but it is one piece of a larger educational journey.