Strikes, Expiry & Moneyness

Lesson 3: Strikes, Expiry & Moneyness

Options have a strike price and an expiration date. Where the stock price sits relative to the strike determines everything — from how the option behaves to what it costs.

Moneyness

This is the fancy word for "how much intrinsic value does this option have right now?"

TermCallPutAt Expiry
ITM (In The Money)Stock > StrikeStock < StrikeHas intrinsic value; exercised automatically
ATM (At The Money)Stock ≈ StrikeStock ≈ StrikeExpires worthless; highest time value
OTM (Out of The Money)Stock < StrikeStock > StrikeExpires worthless; pure extrinsic value
Stock Price: $100 Call ITM (strikes < $100) Call OTM (strikes > $100) Put OTM (strikes < $100) ATM Cheaper calls as strike ↑ Cheaper puts as strike ↓

Strike Price Selection

This is where the art meets science. Each strike is a trade-off:

StrikePremiumDeltaRisk Profile
Deep ITMExpensive (mostly intrinsic)~0.90Behaves like stock with leverage
Slightly ITMModerate~0.65Good balance of leverage & probability
ATMHighest time value~0.50Maximum gamma, maximum theta decay
Slightly OTMCheap~0.30Lottery ticket with a real chance
Far OTMDirt cheap~0.05Pure lottery ticket — 0DTE gambler's choice

Expiration Dynamics

As expiration approaches, the option's behavior changes dramatically:

Time → Expiration Option Value 90 days: slow decay 45 days: accelerating 0 days: brutal "Plenty of time" "Getting nervous" "PANIC"
⚠️ Pin Risk: If you hold a short option through expiration and the stock closes exactly at your strike, you may not know until Saturday whether you were assigned. This is called pin risk — and it's one of the scariest words in options.

Expiration Cycles

  • Weeklies: Expire every Friday. Most liquid. WSB playground.
  • Monthlies: Third Friday of each month. Standard.
  • Quarterlies: End of quarter. Often coincide with index rebalancing.
  • LEAPS: Expire 1-3 years out. Long-term directional bets.
  • 0DTE: Expire today. Maximum gamma, maximum theta, maximum degeneracy.

🧠 Knowledge Check

1. A stock is trading at $150. A call with a $140 strike is:

2. Theta decay is slowest at which point?

3. Far OTM options are popular on WSB because:

Further Reading