What Does "At the Money" Mean?

What does “at the money” mean?

At the money, in the money, and out of the money are terms that describe the relationship between an option or binary option and the underlying market that it’s based on.

If the current price of the underlying market is equal to the strike price of the binary option, the option is said to be “at the money.”

In the money & out of the money

The Yes or No QuestionIf you buy a binary (or any) option, you want the underlying market price to be above the strike price at expiration. In other words, you want it to be in the money.

If you sell a binary (or any) option, you want the underlying market price to be at or below the strike price at expiration. In other words, you want it to be at the money or out of the money.

A binary option that expires in the money receives the full payout of $100. An at-the-money binary will not, since every binary option is based on the question:

Will this market be above this strike price at expiration?

An at-the-money binary is close, but needs to move one more increment (cent, tick) to be in the money and get the full payout for the buyer.

To put it another way, the buyer of a binary option that expires at the money will receive a zero payout and the seller will receive the $100.

Extrinsic and intrinsic value

Before expiration, an option has extrinsic value, which reflects how likely it is to expire in the money. It may also have intrinsic value, if the market is already above its strike price.

An in-the-money option will have a higher price than at- or out-of-the-money options, because it has both intrinsic and extrinsic value. The market is already above its strike price. As long as it stays there, the in-the-money option will get the full payout.

At- or out-of-the-money options need the market to move further up. They have no intrinsic value and less extrinsic value, since they have a lower probability of expiring in the money than an option which is already in the money.

Exiting trades before expiration

Remember that you can exit a trade prior to expiration and receive the current bid or offer value of the contract. If you bought the binary, you will sell at the bid to exit. If you sold to enter the trade, your exit order will be a buy at the current offer.

This is true regardless of whether an option is at, in, or out of the money. For example, you could buy an out-of-the money binary and sell it for a higher price while it is still out of the money. Or you could sell an in-the-money option and exit as the market drops to just around the strike price. Your profit or loss is always the difference between the amount you paid to enter and the amount you receive upon exit.

 

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