ITM, OTM, ATM in Call and Put Options - Explained with Nifty Examples

Option trading involves several terms that help traders understand the relationship between an option’s strike price and the current market price of the underlying asset. The three core terms used to describe the option strike price are ITM, OTM, and ATM.

These terms describe the moneyness of the option and help traders evaluate the intrinsic value, premium, risk and potential profitability.

ITM, OTM, and ATM concepts are useful when reading an option chain, comparing different strike prices, selecting option contracts and developing trading strategies.

This comprehensive guide explains ITM, OTM and ATM options in detail, along with the differences and why traders should analyse them.

What is Moneyness in Options?

Moneyness is a financial term used in option trading to describe the relationship between an option's strike price and the current market price of the underlying asset. It helps determine whether the option has intrinsic value.

Moneyness doesn’t directly indicate whether an option trade will be profitable. Instead, it describes the option’s position relative to the underlying asset’s current price.

The three main types of moneyness in options are ITM, OTM, and ATM:

• ITM stands for In-the-Money options.
• OTM stands for Out-of-the-Money options.
• ATM stands for At-the-Money options.

Also Read: What is an Option Chain and How to Analyse it?

Understanding Call Option and Put Option

A call option gives the buyer the right, but not the obligation, to purchase the underlying asset at a predefined strike price before or at expiry, depending on the contract.

On the other hand, a put option gives the right, but not the obligation, to sell the underlying asset at a predetermined strike price before or at expiry.

From the perspective of a Call Option:

• ITM options are those with strike prices which are below the underlying spot price.
• OTM options are those with strike prices above the underlying spot price.
• ATM options are those with a strike price equal to the spot price.

Example: Suppose the Nifty is trading at 24,000.

In this scenario:

• Strike prices below 24,000, such as 23900, 23800, 23700, 23600 and so on, are ITM options.
• Strike prices above 24,000, such as 24100, 24200, 24300, 24400 and so on, are OTM options.
• The strike closest to 24,000 is considered an ATM option.

From the perspective of a Put Option:

• ITM options are those with strike prices which are above the underlying spot price.
• OTM options are those with strike prices below the underlying spot price.
• ATM options are those with a strike price which is very close to the spot price.

Example: Suppose the Nifty is trading at 24,000.

In this scenario:

• Strike prices above 24,000, such as 24,100, 24,200, 24,300 and so on, are ITM options.
• Strike prices below 24,000, such as 23,900, 23,800, 23,700 and so on, are OTM options.
• The strike price closest to 24,000 is considered an ATM option.

Also Read: What is Intrinsic Value and Time Value in Options?

What are ITM Options?

An ITM option is a contract with intrinsic value because exercising it at the current market price would provide the option holder with an economic advantage.

Intrinsic value represents the immediate economic value of an option if exercised at the current underlying price.

A call option contract is ITM when the underlying asset’s price is above its strike price. ITM option premium includes both intrinsic value and time value. As a result, the option premium is higher than that of comparable ATM and OTM options.

ITM options require a smaller favourable price movement to become profitable faster than ATM or OTM options.

Example 1:

• Nifty is trading at 24,000, and trader A holds a call option with a strike price of 23,800.
• In this scenario, the 23,800 call option is considered ITM because the underlying asset price is above the strike price.

Example 2:

• Nifty is trading at 24,000, and trader B holds a put option with a strike price of 24,200.
• In this scenario, the 24,200 put option is considered an ITM because the underlying asset price is below the strike price.

What are OTM Options?

An OTM option contract has no intrinsic value because exercising it immediately would not provide an economic benefit.

These options have lower premiums because their value primarily reflects time value and volatility expectations. OTM contracts are less favourable for option buyers because premium decay affects all options' prices over time.

A call option contract is OTM when the underlying asset’s price is below the strike price. On the other hand, a put option contract is OTM when the underlying asset’s price is above the strike price.

Example 1:

• Nifty is trading at 24,000, and trader A holds a call option with a strike price of 24,200.
• In this scenario, the 24,200 call option is considered OTM because the underlying asset price is below the strike price.

Example 2:

• Nifty is trading at 24,000, and trader B holds a put option with a strike price of 23,800.
• In this scenario, the 23,800 put option is considered OTM because the underlying asset price is above the strike price.

What are ATM Options?

An ATM option has a strike price that is equal to or very close to the current market price of the underlying asset. These options have little or no intrinsic value because the strike price and the market price are approximately equal.

ATM options contain little or no intrinsic value and more time value because the market is uncertain about the direction of the underlying asset. These options react more quickly to changes in the underlying price than OTM options.

ATM options are widely used in short straddle and long straddle strategies.

In a short straddle, both the call and put options at the same ATM strike are sold to benefit from premium decay. Both the call and put options at the ATM strike are bought in anticipation of a large market move.

Difference Between ITM, OTM and ATM Options

The core difference between ITM, OTM, and ATM options lies in their relationship to the underlying asset's current market price. Here are a few more differences to help you understand better.

Why Do Traders Analyse ITM, OTM and ATM options?

Traders analyse ITM, OTM and ATM options to understand how different strike prices respond to changes in the underlying asset. Analysing the option strikes is useful for several other reasons, as follows:

• Option Selection:

Traders compare different strikes to select contracts based on expectations of market movement, risk, and capital.

• Risk Management:

Understanding the moneyness concept helps traders assess potential premium losses, intrinsic value, and the probability of an option expiring worthless.

• Strategy formation:

ITM, ATM, and OTM options are combined in strategies such as spreads, straddles, and strangles.

• Option chain analysis:

Traders use the option chain to compare strike prices, premiums, open interest, volume, and implied volatility across different levels of moneyness.

• Market Sentiment:

The distribution of open interest, volume, and premiums across strikes can provide useful information about market positioning and expectations.

Why Do Option Prices Differ Across ITM, OTM, and ATM Options?

The option premium depends on several factors, including intrinsic value, time to expiry, implied volatility, interest rates and the underlying asset price.

Here is how option prices vary across ITM, OTM and ATM options:

• Intrinsic value:

The ITM option premium includes intrinsic value, whereas ATM and OTM premiums primarily reflect time value and market expectations.

• Time Value:

The time value is the additional premium traders pay for the possibility that the option may increase in value before expiry.

• Volatility Impact:

Higher implied volatility can increase premiums across ITM, ATM and OTM options, because larger price movements are possible.

• Expiry Impact:

As expiry approaches, the time value declines, with the option losing value more quickly when other factors remain unchanged.

• Distance in Strike Prices:

A large distance between the strike price and the current market price generally reduces the premium on an OTM option.

Which Options Are Cheaper: ITM, OTM or ATM?

OTM options are considered cheaper than ITM and ATM options when comparing contracts with the same expiry and underlying asset. This is primarily because OTM options lack intrinsic value.

ATM options generally have higher premiums than OTM options because they are closest to the current market price and often contain significant time value.

ITM options have higher premiums than otherwise comparable ATM and OTM options because they include intrinsic value in addition to time value.

Cheaper does not mean better. An OTM option may cost less but can lose its entire premium if the underlying asset does not move sufficiently before expiry. Similarly, an ITM option may be more expensive but can provide greater intrinsic value and a different risk profile.

FAQs

What are ITM, OTM and ATM options?

ITM, OTM and ATM options are financial terms used in option trading. They help describe the relationship between an option’s strike price and the current market price of the underlying asset. ITM options have intrinsic value; ATM options generally have little or no intrinsic value and can have substantial time value; and OTM options have no intrinsic value.

How do I know if my option is ITM or OTM?

For a call option, an option is ITM when the market price is above the strike price and OTM when the market price is below the strike price.

For a put option, ITM when the market price is below the strike price and OTM when the market price is above the strike price. An option is ATM when its strike price is approximately equal to the current market price.

Which option is cheaper: ITM, OTM, or ATM?

An OTM option is generally lower-priced because it has no intrinsic value. ATM options generally have higher premiums than OTM options because they are close to the current market price and typically have substantial time value.

ITM options generally have higher premiums than otherwise comparable ATM and OTM options because they include intrinsic value as well as time value.