Understanding option moneyness is essential for traders because it shapes how an option is priced, how risky it is and when itтАЩs likely to be profitable. An option’s moneyness affects its premium cost, intrinsic value, and probability of exercise.
This applies to both call options and put options, making moneyness a key factor in planning trades, managing risk, and choosing the right strike price for your strategy. Keep reading to know more!
What is Option Moneyness?
In options trading, moneyness refers to the relationship between an optionтАЩs strike price and the present market rate of the underlying asset. It helps traders quickly assess whether exercising the option right now would be profitable.
Moneyness matters because it directly influences an optionтАЩs premium (price) and its likelihood of being exercised. Options that are already profitable (In The Money) carry higher premiums, while those far from profitability (Out of The Money) are cheaper but riskier.
There are three main categories of moneyness:
- ITM (In The Money): The option has intrinsic value; exercising it now would be profitable.
- ATM (At The Money): The optionтАЩs strike price is pretty close to the current market price.
- OTM (Out of the Money): The option has no intrinsic value; exercising it now would lead to a loss.
ITM (In The Money) Options Explained
The ITM full form in trading is In The Money. This term is used when an option already holds intrinsic value, meaning exercising it right now would generate a profit.
For a call option, this happens when the strike price is lower than the current market rate of the underlying asset. For example, if a stock is trading at тВ╣1,000 and you have a call with a тВ╣950 strike, you could buy at тВ╣950 and immediately sell at тВ╣1,000, making it тАЬin the money.тАЭ
For a put option, the situation is reversed. A put is in the money when the strike price is higher than the current market price. For instance, if a stock trades at тВ╣900 and you hold a put with a тВ╣950 strike, you could sell at тВ╣950 when the market is at тВ╣900, again creating intrinsic value.
Because they already have value, ITM options are more expensive than out-of-the-money (OTM) options but also carry a higher probability of expiring profitably. Traders often use them for strategies such as protective puts or when they plan to exercise the option rather than just speculate on price movement.
ATM (At The Money) Options Explained
The ATM full form in trading is At The Money. An option is considered an ATM when its strike price is almost the same to the current market price of the underlying asset.
For example, if a stock is trading at тВ╣1,000, both a call option and a put option with a тВ╣1,000 strike would be at the money. In this situation, the option has no intrinsic value тАФ exercising it immediately wouldnтАЩt create a profit тАФ but it often has the highest time value among all strikes because the market sees it as having the greatest potential to swing in either direction before expiry.
ATM options are popular among short-term traders who want to capture quick price movements without paying the higher premiums of ITM options or taking the lower probability bets of far OTM options. TheyтАЩre often used for intraday momentum plays or for hedging just before events like earnings announcements, when volatility can cause sharp moves.
OTM (Out of The Money) Options Explained
The OTM full form in trading is Out Of The Money. An option is OTM when exercising it would not be profitable at the current market price.
For a call option, this happens when the strike price is more than the market price. For example, if a stock trades at тВ╣1,000, a call with a тВ╣1,050 strike is out of the money.
For a put option, itтАЩs the reverse тАФ the strike price is less than the market rate. So if the same stock trades at тВ╣1,000, a put with a тВ╣950 strike is OTM.
OTM options have no intrinsic value, only time value, which makes them cheaper than ATM or ITM options. That lower premium comes with higher risk, as they require the market to move significantly in your favour before expiry to become profitable.
This is why OTM options are often used in speculative strategies, such as betting on sharp price movements, or in combination trades like spreads. However, they are also less likely to be exercised, and many expire worthless if the expected move doesnтАЩt occur.
Key Differences Between ITM, ATM & OTM Options
Here are the key differences between ITM (In The Money), ATM (At The Money), and OTM (Out of The Money) options:
| Type | Strike Price vs. Market Price | Risk | Reward Potential | Ideal Use Cases |
| ITM (In The Money) | Call: Strike < MarketPut: Strike > Market | Lower | Moderate | Exercising options, protective puts, and lower-risk directional trades |
| ATM (At The Money) | Strike тЙИ Market | Moderate | Moderate to High | Short-term trading, straddles/strangles, volatility plays |
| OTM (Out of The Money) | Call: Strike > MarketPut: Strike < Market | High | High | Speculative trades, low-cost directional bets, option spreads |
Real-Life Examples of ITM, OTM & ATM Options
LetтАЩs assume Stock ABC is currently trading at тВ╣100. WeтАЩll look at both Call and Put options for strike prices of тВ╣90, тВ╣100, and тВ╣110 to understand how moneyness works in practice.
1. In The Money (ITM) Options
- Call Option Example: Strike Price тВ╣90 тЖТ Market Price тВ╣100
- The buyer has the right to buy at тВ╣90 when the market is тВ╣100 тЖТ тВ╣10 intrinsic value.
- Higher premium due to built-in profit potential.
- Put Option Example: Strike Price тВ╣110 тЖТ Market Price тВ╣100
- The buyer can sell at тВ╣110 when the market is тВ╣100 тЖТ тВ╣10 intrinsic value.
Impact: ITM options already have value even if exercised immediately, which reduces risk but increases cost.
2. At The Money (ATM) Options
- Call Option Example: Strike Price тВ╣100 тЖТ Market Price тВ╣100
- No intrinsic value, only time value.
- Put Option Example: Strike Price тВ╣100 тЖТ Market Price тВ╣100
- No intrinsic value, only time value.
Impact: ATM options are most sensitive to small price changes and are often used for short-term or volatility-based strategies.
How Moneyness Affects Profit/Loss
- ITM: Higher chance of profit, but costs more.
- ATM: Balanced cost, reacts fastest to price movement.
- OTM: Low cost, high risk, depends entirely on favourable price movement.
3. Out of The Money (OTM) Options
- Call Option Example: Strike Price тВ╣110 тЖТ Market Price тВ╣100
- No intrinsic value; you wouldnтАЩt pay тВ╣110 when you can buy at тВ╣100.
- Put Option Example: Strike Price тВ╣90 тЖТ Market Price тВ╣100
- No intrinsic value; you wouldnтАЩt sell at тВ╣90 when you can sell at тВ╣100.
Impact: OTM options are cheap but purely speculativeтАФprofit only if the market moves significantly in your favour before expiry.
How to Choose Between ITM, OTM, and ATM?
Your choice between ITM, ATM, and OTM options should align with your goal, risk tolerance, and market outlook. Each has a distinct role in trading and hedging, so understanding when to use which can make a big difference.
1. Match the Option to Your Objective
- If your goal is hedgingтАФsuch as protecting an existing stock positionтАФITM options are generally the safest. They already have intrinsic value and move closely with the underlying asset, offering stronger downside protection.
- For short-term volatility plays, traders often choose ATM options. They have no intrinsic value but the highest time value, making them responsive to quick price swings.
- If youтАЩre speculating with a small budget and willing to take a higher risk, OTM options are the cheapest way to bet on a big market move. They can deliver high percentage returns if the move happens, but expire worthless if it doesnтАЩt.
2. Weigh Key Factors Before Deciding
- Volatility: Higher volatility can make OTM options more attractive because big moves are more likely. In calmer markets, ITM options are a safer choice.
- Time to Expiry: The more time left, the more room OTM options have to become profitable. For near-term trades, ITM strikes offer more certainty.
- Premium Affordability: ITM options cost the most due to their intrinsic value, ATM options are moderately priced, and OTM options are the cheapestтАФbut with higher risk.
3. Strategy-Specific Choices
- Protective Hedging: Buy ITM puts to safeguard long stock positions.
- Income Generation: Sell slightly ITM or ATM covered calls for steady premium income.
- Event Trading: Use ATM options for straddles and OTM options for strangles to capture large price swings in either direction.
- Spread Strategies: Mix ITM and OTM strikes to balance cost, risk, and reward.
Final Thoughts: Why Option Moneyness Matters
Understanding option moneynessтАФwhether an option is ITM, ATM, or OTMтАФgives traders and investors a clear edge in the market. ItтАЩs not just about knowing the definitions; itтАЩs about matching the right strike to your strategy, budget, and risk tolerance.
Moneyness directly impacts an optionтАЩs price, probability of profit, and role in your portfolio, making it a crucial factor in both trading and hedging decisions. By choosing wisely, you turn options from a guessing game into a calculated move.
FAQs
What is the full form of ITM in trading?
The ITM full form in trading is In The Money. An in the money option is one where exercising it would give the holder an immediate profit. For example, a call option is ‘in the money’ if the stockтАЩs current market price is higher than the strike price. Similarly, a put option is ITM if the market price is lower than the strike price.
How do you identify if an option is ITM, ATM, or OTM?
To identify if an option is ITM, ATM, or OTM:
- In the Money (ITM): The option has intrinsic value. For calls, the market price is above the strike; for puts, itтАЩs below the strike.
- At the Money (ATM): The market price is roughly equal to the strike price.
- Out of the Money (OTM): The option has no intrinsic value. For calls, the market price is below the strike; for puts, itтАЩs above the strike.
Is it better to buy ITM or OTM options?
Whether itтАЩs better to buy in the money or out of the money options depends on your strategy and risk tolerance. In the money options cost more but have higher intrinsic value and a better probability of expiring profitably. OTM options are cheaper but carry a higher risk as they need a significant price move to become profitable.
What happens if an option expires ITM?
If an option expires in the money, the buyer can exercise it and realise the intrinsic value as profit, or it may be settled in cash or stock delivery depending on the exchange rules. For example, an in-the-money Nifty option on NSE is automatically exercised at expiry, with profits credited to the traderтАЩs account after settlement.
Are ATM options worth buying?
ATM options can be worth buying if you expect a quick and significant price move. Being at the money, they have no intrinsic value but high sensitivity to price changes (delta) and time decay. Traders often use ATM options for short-term strategies where they expect immediate volatility.
Disclaimer
The information provided in this article is for educational and informational purposes only. It should not be considered as financial or investment advice. Investing in stocks involves risk, and it is important to conduct your research and consult with a qualified financial advisor before making any investment decisions. The author and publisher are not responsible for any financial losses or gains that may result from the use of this information.
