An option’s exercise value at any time t was shown to be its current payoff. The relationship between the option’s total value and its exercise price expresses the option’s moneyness.
Also, the degree to which an option is in or out of the money affects the sensitivity of an option’s price to underlying price changes. For example, a so-called deep-in-the-money option, or one that is highly likely to be exercised, usually demonstrates a nearly one-to-one correspondence between option price and underlying price changes.
A deep-out-of-the-money option, which is very unlikely to be exercised, demonstrates far less option price sensitivity for a given underlying price change. In contrast, relatively small price changes in the underlying for an at-the-money option often determine whether the option will be exercised.
