What are the Difference Between ITM, ATM, and OTM Call and Put Options

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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.

Highlights of the Blog:

Elements of Options Contract

Moneyness of Options Contract

An Illustration Table

Understanding Elements of Options Contracts

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.

Moneyness of Options Contract

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’.

Illustration Table for ITM, ATM, and OTM Call and Put Options  

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.

Conclusion 

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

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