When discussing options, there are several phrases that can be found in both traditional options and binary options. While these phrases are common for experienced option traders, they can sometimes be confusing to new traders. Two of these common phrases are in the money vs out of the money. Below is a description of each that will hopefully remove any confusion regarding the use of each.
In the Money
When an option reaches a point that it is profitable it is considered to be in the money. The phrase is used for both call options that are profitable and put options that are profitable. When traditional options are being discussed, a trader with an in the money option could sell for a profit even if the option has not yet reached expiry. In the case of binary options though, a trader must wait until the option reaches expiry to know if it is in the money or not. In the money is used with a call option if the asset price exceeds the strike price of the option and with a put option when the asset price is lower than the strike price of the option.
Out of the Money
This is the opposite of the option that is in the money. An out of the money option is one that is not profitable and would cause the trader a loss. The phrase out of the money can also be used with both call and put options. With a traditional option the trader does have the ability to sell an out of the money option, and though he would realize a loss it would be less than if he allowed the option to go to expiry. In the case of a binary option, it is not considered to be out of the money until expiry, at which point the trader losses his entire investment. When discussing calls, an option is out of the money when the asset price is lower than the strike price of the option. In the case of puts, the option is out of the money when the asset price is higher than the strike price of the option.
At the Money
This variant is less well known than the in the money and out of the money options, simply because it occurs less frequently. Any time an options strike price is the same as the underlying asset price, it is considered at the money. You can see why this is far less common than in the money and out of the money options. In the case of the traditional option trader, an at the money option equates to a loss. However, for the binary options trader, an at the money option is often a break even case, as the brokers will typically refund the traders investment for binary options that finish at the money.