BAJAJ BROKING
If you are someone who tracks the derivatives market or the stock market in general, you must have heard call and put options. You also must have heard about the moneyness of options such as in the money, out of the money, or at the money.
If you are wondering what these terms related to options trading are or feel uncertain about their precise meaning, this blog is for you. Here, we will learn in detail about all the types of options and explore ways to classify them based on their moneyness.
So let’s get started.
Elements of Options Contract
Moneyness of Options Contract
An Illustration Table
To understand the moneyness of options contracts, it is important to know the two most common elements, strike price, and spot price. Let’s decode them.
Strike Price
The strike price, also known as the exercise price, is the predetermined price at which the buyer of an option holds the right to buy or sell the underlying security. There are call-and-put options of various strike prices simultaneously trading in the market.
For example, if you bought a ₹200 Call Option of ABC Limited at ₹15 per lot, then in this case, ₹200 is the strike price, and ₹15 is the premium you paid to buy the option.
Spot Price
The spot price is nothing but the current market price of the underlying stock. Let’s assume that ABC Limited’s stock performed well and surged to ₹220. In this case, ₹220 is the spot price.
The relationship between the strike price and spot price determines the moneyness of the options contract. Let’s discover how.
In The Money (ITM)
In the case of a call option, if the spot price of the underlying stock is higher than the strike price, then such call options are called ‘in the money’ call options. For put options to be ‘in the money’, the spot price should be lower than the strike price.
Continuing the previous example, since the current market price (₹220) is higher and the strike price of the call option you bought (₹200), it is classified as ‘in the money’.
Out of The Money (OTM)
For a call option to be ‘out of the money’, the spot price should be lower than the strike price. Inversely, in the case of the put option, the spot price must be higher than the strike price to classify as ‘out of the money’.
Let’s assume that instead of buying a ₹200 call option, you buy a ₹250 call option from ABC Limited. Now, if the stock’s current market price is still at ₹220, your call option is ‘out of the money’ since the spot price is lower than the strike price.
At The Money (ATM)
When the spot and strike price are equivalent, such options, whether call or put, are termed ‘at the money’. There are only two options, one call option and one put option, classified as ‘at the money’.
For example, if the spot price of ABC Limited stock is ₹200, then your ₹200 call option is ‘at the money’. Instead, even if you were holding a ₹200 put option, it would also be ‘in the money’.
Let’s assume that the current market price (spot price) of ABC Limited is ₹200.
ABC Limited | ||
Call Option | Strike Price | Put Option |
ITM | 170 | OTM |
ITM | 180 | OTM |
ITM | 190 | OTM |
ATM | 200 | ATM |
OTM | 210 | ITM |
OTM | 220 | ITM |
OTM | 230 | ITM |
In the above table, all the call options with lower strike prices compared to the spot are ITM, and put options with lower strike prices compared to the spot are OTM. Inversely, call options with higher strike prices compared to the spot are OTM and put options with higher strike prices compared to the spot are ITM. Since the spot is ₹200, the call and put options with ₹200 strike price are ATM options.
A simple trick to quickly classify the option between ITM, OTM, and ATM is to compare the strike price with the spot price. In the case of call options, if the spot is higher than the strike price, it is an ‘in the money’ option, and if it is lower than the strike price, it is an ‘out of the money’ option. For put options, if the spot price is lower than the strike price, then it is an ITM option and if it is higher, then the option is OTM. When spot and strike prices are equivalent, the options are ‘at the money’.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For All Disclaimers Click Here: https://bit.ly/3Tcsfuc
Share this article:
Morgan Stanley Acquires 1.4 Crore PNB Housing Finance Shares for ₹1,336 Crore
14 Nov, 2024 | 2 Min. read
Tata Power Commissions 126 MW Floating Solar Project in Madhya Pradesh
14 Nov, 2024 | 2 Min. read
Cipla Receives US FDA Form 483 with Eight Observations at Bengaluru Unit
14 Nov, 2024 | 2 Min. read
Varun Beverages Opens ₹5,500 Crore QIP, Sets Floor Price at ₹594.56
14 Nov, 2024 | 2 Min. read
NTPC Green Energy IPO: Price Band Set at ₹102-108 Per Share
14 Nov, 2024 | 2 Min. read
Commodities Market Today | Gold Falls for Fourth Session, Oil Rebounds on Short-Covering
14 Nov, 2024 | 1 Min. read
Share Market Today | Gift Nifty Indicates Flat Start for Indian Market Amid Mixed Cues
14 Nov, 2024 | 4 Min. read
Gold Rate Today | Gold Prices Fall for Fourth Straight Session Amid Dollar Gains
14 Nov, 2024 | 2 Min. read
Hero MotoCorp Q2 Results FY24-25 Preview | Estimate
14 Nov, 2024 | 1 Min. read
Samvardhan Motherson International Q2 Results FY24-25 Preview | Estimate
14 Nov, 2024 | 1 Min. read
Know NTPC Green Energy IPO Review, Objective & Applying Process
14 Nov, 2024 | 1 Min. read
Hindustan Aeronautics Limited Q2 Results FY24-25 Preview | Estimate
14 Nov, 2024 | 1 Min. read
RBI Launches ULI: Transforming Loan Access
August 27, 2024 | 4 Min. read
Textile Sector in India
September 20, 2024 | 5 Min. read
List of IPOs with DRHPs Filed
November 30, 2023 | 3 Min. read
Aditya Birla Group
September 28, 2023 | 10 Min. read
Bajaj Housing Finance Ltd IPO: Things Smart Investors Need to Know
September 05, 2024 | 4 Min. read
Budget Stock Ideas 2024-2025 | Stocks to Buy Today
July 24, 2024 | 4 Min. read
IPO Eligibility Criteria : Full Details
March 15, 2024 | 6 Min. read
What Is the Lock-In Period in IPOs?
October 18, 2023 | 6 Min. read
Godfrey Phillips Announces 2:1 Bonus Shares
September 16, 2024 | 7 Min. read
Jindal Group- A Comprehensive Analysis
September 27, 2024 | 7 Min. read
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading