Strike Price, Expiration & Moneyness
The three coordinates that define any option contract — and the two components of its price they determine.
Every option contract is defined by two fixed numbers: its strike price (the price at which the holder can buy or sell) and its expiration date (the last day it can be used). Where the stock's current price sits relative to the strike determines the option's "moneyness" — in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM) — which is the single biggest factor in what the contract is actually worth.
| Stock price | Moneyness | What it means |
|---|---|---|
| $110 | In-the-money (ITM) | The right to buy at $100 is already worth exercising — real, intrinsic value |
| $100 | At-the-money (ATM) | The strike and stock price are equal — no intrinsic value yet |
| $90 | Out-of-the-money (OTM) | Exercising would mean buying above the current market price — no intrinsic value |
Intrinsic value is the real, exercisable value (ITM only). Time value is everything else — the market's estimate of the chance the option becomes more valuable before expiration.
Time value exists because there's still time left for the stock to move favorably — as expiration approaches, less time remains for that to happen, so time value steadily erodes, a process called time decay. This erosion isn't linear — it accelerates meaningfully in an option's final weeks, which is exactly the mechanic the Options Greeks lesson (specifically Theta) puts a precise number on.
An at-the-money call option with three months until expiration might trade almost entirely on time value, since it has no intrinsic value yet but plenty of time for the stock to move favorably. The same option, still at-the-money but with only two days left until expiration, is worth dramatically less — nearly all of that time value has decayed away, since there's almost no time left for a favorable move to happen.
- An option's total price is always intrinsic value plus time value — an OTM option is 100% time value, since it has no intrinsic value at all.
- Time decay isn't steady — it accelerates as expiration approaches, which matters enormously for anyone holding (or selling) short-dated options.
- Moneyness changes constantly as the stock price moves — an option can shift between ITM, ATM, and OTM many times before it expires.