Moneyness, Expiration & Time Decay

Where the stock sits relative to the strike — and how much time is left — drives most of an option’s value.

Moneyness

• In the money (ITM) — call: stock > strike; put: stock < strike. Has intrinsic value.
• At the money (ATM) — stock near the strike. Highest time value sensitivity.
• Out of the money (OTM) — call: stock < strike; put: stock > strike. Pure time/vol value; expires worthless if still OTM.

Intrinsic vs extrinsic value

Intrinsic is the immediate exercise value. Extrinsic (time value) is everything else — driven by time to expiration and implied volatility. At expiration, extrinsic goes to zero; only intrinsic remains.

Expiration styles

• American — can be exercised any time (most U.S. equity options).
• European — exercise only at expiration (many index options).

Weekly and monthly expirations, LEAPs, and 0DTE options change how fast theta burns.

Time decay (theta)

All else equal, options lose extrinsic value as time passes. Decay often accelerates into the final weeks for ATM options. Buyers fight theta; sellers often rely on it. Multi-leg positions can be net long or short theta depending on structure.

Next: The option Greeks · Implied volatility