Introduction

In the world of options trading, you will come across several terms like calls, puts, ITM, ATM, OTM etc. Understanding these terms is crucial for anyone interested in trading options. You are in the right place if you wonder what they mean or aren't certain of their precise meaning.

Options are categorised into In-The-Money (ITM), Out-Of-The-Money (OTM), and At-The-Money (ATM), depending on their intrinsic value. All these terms essentially refer to the difference between the strike and current prices of an option. The strike price is the predetermined price at which, you, an option holder can exercise your option to purchase or sell the underlying asset. On the other hand, the current or spot price is the current market price of the underlying asset.

Open Demat Account and Start Trading!

In this article, you will be introduced to call and put options and what ITM, ATM, OTM mean in relation to them.

What are Call Options?

Acquiring a call option allows you to buy the underlying stocks at a predetermined price on or before the contract expires. You are not obligated to exercise the option, but the seller must honour it once it is exercised.

Here is what ITM, ATM, OTM mean for call options.

• In-The-Money (ITM) Call Option

If the strike price of an underlying asset is lower than its current price, the call option is said to be in-the-money. Let's assume the current call option price you hold is ₹10,000, and the strike price is ₹9,800. The call option's intrinsic value is ₹200. If you exercise your call option, you can buy it for a price lower than the market value.

• Out-of-The-Money (OTM) Call Option

The call option is considered out-of-the-money if an option's current price is lower than an underlying asset's strike price. Considering the above example, if the strike price is ₹10,200 and the current price is ₹10,000, it's an OTM call option. On the face of it, it doesn't look like a profitable trade to exercise the option, and it will be profitable only if the current price rises above ₹10,200 before expiration.

• At-The-Money (ATM) Call Option

When the strike and market prices of a call option are equal on the expiry date, the option is said to be at-the-money. In the previous example, if the option's strike price is ₹10,000 and its current price is ₹10,000, you have an ATM call option.

What are Put Options?

A put option allows you to sell underlying stocks at a predetermined price before or on the contract's expiration. Usually, a good time to execute put options is when you believe the price of a specific stock will reduce.

Here is what ITM, ATM, OTM mean for put options.

• In-The-Money (ITM) Put Option

If the current or spot price of the underlying asset is lower than its strike price, the put option is said to be in-the-money. Let's assume the strike price of a put option you hold is ₹10,000. As long as this asset's spot price doesn't hit ₹10,000 or exceed this sum, the option will be ITM.

• Out-of-The-Money (OTM) Put Option

If the current price of an underlying asset is higher than its strike price, the put option is said to be out-of-the-money. Consider the example discussed above with a strike price of ₹10,000. If the put option's spot or current price is higher than ₹10,000 on or before expiry, the put option will be OTM.

• At-The-Money (ATM) Put Option

As with a call option, if the strike price and the market price of the underlying asset of a put option are nearly equal or the same, then the option is at-the-money. Going with the above example, if the contract's strike price is ₹10,000 and the current price is ₹10,000, then the put option is at-the-money.

Conclusion

Understanding the difference between ITM, ATM, OTM and the strike prices is needed to profitably trade options. By doing this, you can assess the risk of entering a position, manage open positions, and find the profitability of a trade. Each of these terms differs and offers a different risk-reward profile, profit potential, and upfront costs. As with any other investment decision, carefully consider your risk appetite and investment goals to ensure ITM, OTM, or ATM call or put options fit you.

Financial Calculators: SWP Calculator | EMI Calculator | SIP Calculator | Compound Interest Calculator | CAGR Calculator | Sukanya Samriddhi Yojana Calculator | Retirement Calculator | Mutual Fund Returns Calculator | EPF Calculator | Inflation Calculator

Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price