How Does the Concept of “Moneyness” (ITM, ATM, OTM) Affect the Value Breakdown?
Moneyness dictates the proportion of intrinsic versus extrinsic value. ITM options have both intrinsic and extrinsic value, with intrinsic dominating the deeper ITM they are.
ATM options are 100% extrinsic value. OTM options are also 100% extrinsic value.
This breakdown is crucial because only the extrinsic value is subject to Theta decay.
