Lesson film
Watch this lesson as a short film
Split any premium into what it is worth now and what it is worth in time — the part a seller collects.
What you'll learn
- Classify any put or call as in-, at-, or out-of-the-money
- Split a premium into intrinsic and extrinsic (time) value
- Explain how moneyness and days-to-expiration drive premium
Moneyness answers a simple question: if this option expired right now, would it be worth anything? The answer depends on where the stock price sits relative to the strike — and it flips between puts and calls. Get this straight and option pricing stops feeling random.
ITM, ATM, OTM — for puts AND calls
| Term | A CALL is this when | A PUT is this when |
|---|---|---|
| In-the-money (ITM) | Stock ABOVE strike | Stock BELOW strike |
| At-the-money (ATM) | Stock near the strike | Stock near the strike |
| Out-of-the-money (OTM) | Stock BELOW strike | Stock ABOVE strike |
Wheel sellers usually start by selling OTM puts — strikes below the current price — because the stock has to fall before they are obligated to buy. After assignment, they sell OTM calls — strikes above their cost — for the same reason.
What would you do?
Your call
KO trades at 60. You want to open the wheel the way sellers usually do — with a put. Which strike do you sell?
Intrinsic vs. extrinsic value
Fig. 1Interactive
Make a guess
AAPL trades at 187. A 190-strike put is priced at 5.40. How much of that premium is extrinsic (time) value?
DTE: the clock matters too
DTE stands for days to expiration. More days left means more time value, so options further out cost more. A 45-day put collects more premium than a 7-day put at the same strike — but the 7-day option decays faster per day. Wheel traders often live in the 30-to-45-day window as a balance between premium collected and how fast it decays.
Put in order
Same stock, same strike. Order these puts from the smallest premium to the largest.
- 45 days to expiration
- 21 days to expiration
- 7 days to expiration
- 90 days to expiration
Key terms in this lesson
Each term has its own glossary page with a picture and related terms.
- Intrinsic valueGlossary entry
- The real, here-and-now value if the option expired this instant. Only ITM options have intrinsic value.
- Extrinsic (time) valueGlossary entry
- Everything above intrinsic value — the price of the time and uncertainty left before expiration. This is the part that decays away.
Key takeaways
- Moneyness is mirror-imaged: a call is ITM above the strike, a put is ITM below it.
- Premium = intrinsic value + extrinsic (time) value; only ITM options have intrinsic value.
- More DTE means more time value, but it decays slower per day; OTM options are pure time value, which is why sellers favor them.
Checkpoint
Knowledge check
Answer to lock in what you just learned.
MSFT trades at 408. A 400-strike PUT is…
An OTM option's premium is made up of…
What does DTE stand for, and how does more of it affect premium?
Keep going
7 more chapters, from your first put to an expert playbook
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Educational content only — not financial advice. Options involve risk of loss and are not suitable for every investor.