In the world of options trading the terms in the money ITM at the money ATM and out of the money OTM are frequently used and serve as important indicators for classifying options based on their current value. Let's have a look at exactly what these terms mean.

A call option is considered to be in the money when the current underlying asset price is above the strike price. This advantageous position allows the holder the opportunity to purchase the asset at a rate more favorable than the prevailing market price paving the way to a potential profit. Conversely, a put option is deemed to be in the money when the underlying asset is below the strike price, providing the holder with the capacity to sell the asset at a better price under the terms of the option than they could do in the market. Once again, opening the door to a potential gain.

Both cool and put options are described as being at the money when their strike price is at or near the current market price of the underlying assets. In such instances, the immediate financial incentive to exercise the option is neutral as the strike price and market price are in a state of parity.

And finally, we have out of the money options. These represent a scenario where exercising the option is not economically beneficial under the prevailing market conditions. For calls, this is when the underlying asset is below the strike price. For puts, this is where the underlying asset is above the strike price.

While the concept of moneys is generally straightforward, it is crucial to approach them with care. This is because an option's moneyness can be made in reference to either the spot price or the forward price of the underlying asset. Given that spot and forward prices may diverge significantly. This distinction is not merely academic. It is essential for accurate classification. For example, a 12 month call option with a strike price of 105 on an underlying asset currently trading at a spot price of 100 and a forward price of 105 can be characterized as out of the money when assessed against the spot price, but at the money when appraised In relation to the forward price, it is also important to acknowledge that an option's moneys is not static, but can change over the course of an option's life as the underlying asset price moves. An option that was outta the money when it was acquired may turn into an at the money or even in the money as the underlying asset price changes.