In-the-Money (ITM) Options:
- An option is considered in-the-money (ITM) when it has intrinsic value. For call options, this means the current market price of the underlying asset is higher than the option's strike price. For put options, it means the market price is lower than the strike price.
- Intrinsic value is the difference between the current market price and the strike price.
- In-the-money options typically have a higher premium because they already have some real value.
Out-of-the-Money (OTM) Options:
- An option is out-of-the-money (OTM) when it does not have intrinsic value.
- For call options, this means the current market price of the underlying asset is lower than the option's strike price. For put options, it means the market price is higher than the strike price.
- OTM options only have time value, which is the premium paid for the potential to become profitable before expiration.