In the money, at the money, and out of the money

These three terms describe where an option's strike price sits relative to the current price of the underlying stock, and whether exercising the option right now would produce a profit. A call option is in the money when the stock price is above the strike price, since exercising it would let the holder buy the stock below where it currently trades. A put option is in the money when the stock price is below the strike price, since exercising it would let the holder sell the stock above where it currently trades.

An option is out of the money when the opposite is true, a call with a strike above the current stock price, or a put with a strike below it, meaning exercising it right now would produce no benefit compared to trading the stock directly. An option is at the money when the strike price and the stock price are equal, or close enough to equal that the distinction barely matters in practice.

The difference matters because it determines how much of an option's premium is intrinsic value, the amount it would be worth if exercised immediately, versus time value, the extra amount investors pay for the chance the option becomes more valuable before expiration. An option that is in the money has both intrinsic value and, usually, some time value. An option that is at the money or out of the money has no intrinsic value at all, its entire premium is time value, which is also why out of the money options tend to be cheaper and more sensitive, in percentage terms, to a move in the underlying stock.