What is ATM / OTM / ITM in Options?
Options trading and options trading app may appear confusing initially, but it's simple to grasp if you understand a few fundamental concepts. Often, multiple asset classes are used to build investor portfolios. These could be bonds, equities, ETFs, or even mutual funds.

An option is an agreement that grants the buyer the right, but not the responsibility, to buy the underlying asset (in the instance of a call) or sell it (in the event of a put) at a certain price on or before a specific date. People use options for revenue, speculation, and risk hedging. Because they draw their worth from a fundamental asset, options are classified as derivatives.

Online stock trading regularly uses the phrases ATM, OTM, and ITM. You can trade more successfully if you understand these words. This blog lets you learn more about ATM, OTM, and ITM in options investing.

Terminology Involved in Options Trading

Important fundamental terminologies used with ATM, ITM, and OTM are

  • Strike Price
    The price that must be met to exercise an options contract is the strike price.
  • Spot Price
    The spot price represents the most recent price at which an options contract is exchanged.
  • Intrinsic Value
    An options contract's intrinsic value refers to the amount the buyer anticipates receiving if the contract is exercised on a specific date. For a call option, the intrinsic value is determined by subtracting the current value (spot price) from the strike price, and for a put option, the opposite is true. An option's inherent value is either high or zero and cannot take on a negative value.

Understanding The Concepts Of At The Money, In The Money, And Out Of The Money

One of three words, also known as the option's moneyness, is used to characterize the association between an option's striking price and the underlying asset's price at the money (ATM), also known as "on the money".

There are three options: in-the-money (ITM), out-of-the-money (OTM), and ATM. An option's intrinsic value is indicated by the letters ITM or OTM. ATM options have value even when not in a favorable situation if exercised; they still have time before expiring and could potentially wind up ITM.

If you feel stuck anywhere, you may develop clever and successful options trading strategies using the options strategy builder.

ATM (At The Money)

Here is the definition of an ATM if you're curious. An option contract with an at-the-money strike price is the one that is most similar to the current market price. An ATM option is treated as such, even though the strike price corresponds to the spot price.

For instance, if an option's closest strike price is Rs 5,560 and the market price of a particular currency with INR is Rs 5,600, the intrinsic value is Rs 5,600 - Rs 5,560, or Rs 40. Consequently, it's going to be a choice for ATMs.

Compared to OTM and ITM, ATM options need a modest premium to be paid, but since they only use time value, the likelihood of getting the predicted benefits is reasonable.

OTM (Out Of The Money)

It will be called an Out-Of-The-Money (OTM) option if it has zero intrinsic value. The spot price of a call option in OTM falls below the strike price. An OTM put option does have a strike price that is less than the current market value.

Using the spot price of Rs. 5,600 as an example, the intrinsic value will be Rs.5,600 -Rs. 6,300=-700 if the strike price were Rs. 6,300. Zero is the intrinsic value of a negative number. An OTM call option is an agreement for options with no intrinsic value.

Compared to ITM options, OTM options are even less expensive because the premium includes time value. Choose OTM because it involves less risk if you anticipate a rise in the price of a currency.

ITM (In The Money)

It is called "In The Money" if the option has inherent value (ITM). The strike and spot prices for a call option in ITM will be higher. The strike price of a put option in ITM will fall below the spot price.

If the spot price is Rs. 5,600 and the option's strike price is Rs. 4,900, the intrinsic value is Rs. 5,600 minus Rs. 4,900, or Rs. 700. This option contract shall be deemed an ITM call option because it has an inherent value.

Generally speaking, ITM choices are more expensive than OTM and ATM options. But because the premium combines the time to value and intrinsic value, the likelihood of realizing the anticipated gains is excellent.
Also, the option's intrinsic value is determined by deducting the strike price from the current value of the underlying security. On the contrary, a put option's intrinsic value is determined by subtracting the strike price from the present value of the underlying asset.

So, in short, when the strike price of a call option falls short of the value of the underlying asset at the time of purchase, the option is in the money. When the strike prices price exceeds the stock price of the underlying securities, on the other hand, a put option is in the money. 

Alternatively, a put option is out-of-the-money (OTM) when its spot price is lower than the current value of the underlying asset, and a call option is when the strike price is higher than the underlying security's price. If nothing else, you can design various futures and options products using the options strategy builder before making transactions.

Time in ATM, OTM, and ITM Options

Is forex trading profitable? The answer is yes if you spend time and effort comprehending the complexities of forex options trading apps. The first step in trading currency pairings is understanding how to choose ATM, ITM, and OTM.

It would be best to consider the alternatives' time worth when choosing any of these. Time value commonly referred to as "extrinsic value," is the worth of the asset above and beyond its intrinsic value. The option contract retains a "time value" during its whole existence until the expiration date.

As the contract gets closer to expiration, this value gradually drops. If you compare an option ending in the new month to one ending three months from now, the option with the later expiration date will cost more and have a higher time value.

Because more time remains until a contract expires, the likelihood that the transaction will go in your favor increases. Thus before selecting a particular type, consider the remaining time value on the option contract.

What is an Options Chain?

The option chain is a standard feature on most options trading apps, platforms, and exchanges. The option chain acts as a form of ready reckoner, assisting you in discovering all the strikes which are offered for a specific fundamental and classifying the strikes according to their moneyness. 

In addition, the option chain provides details about each option strike, including the premium, bid, ask price, volume, open interest, etc.


When you understand the fundamental ideas behind an option, it need not be complicated to understand. You are now prepared to delve deeper into options after having a basic understanding of put and call options from the standpoints of both buyers and sellers and a basic knowledge of the terms ITM, OTM, and ATM. 

Options can be beneficial when appropriately utilized and destructive when misused. Start online stock trading in the share market today.
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Prachi 20 July, 2023
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