Difference Between OTM, ITM and ATM Options

ATM, ITM, and OTM options are classified by comparing the strike price with the current market price of the underlying asset.

• An ATM option has a strike price equal or very close to the current market price.
• An ITM call option has a strike price below the current market price.
• An ITM put option has a strike price above the current market price.
• An OTM call option has a strike price above the current market price.
• An OTM put option has a strike price below the current market price.
• For example, when a share trades at ₹500, a ₹500 strike option is ATM, a ₹480 call option is ITM, and a ₹520 call option is OTM.
• ITM options have intrinsic value. ATM and OTM options generally do not have intrinsic value.
   

ATM, ITM, and OTM are terms used to describe the moneyness of an option. They compare:

• The current market price of the underlying asset

• The strike price stated in the option contract

  
  

The classification also depends on whether the contract is a call option or a put option.

ATM

An option is considered at-the-money when its strike price is equal or very close to the current market price of the underlying asset. For example, suppose a share is trading at ₹500. An option with a strike price of ₹500 would be ATM. An ATM option generally has no intrinsic value. However, it may still have time value, which forms part of its premium.

ITM

An option is in-the-money when its strike price is favourable compared with the current market price.

For a call option:

• It is ITM when the market price is higher than the strike price.

  
  

For a put option:

• It is ITM when the market price is lower than the strike price.

  
  

For example, if a share trades at ₹500, a call option with a strike price of ₹480 is ITM. It has an intrinsic value of ₹20 per share.

However, intrinsic value does not automatically mean that the buyer has made a net profit. The premium paid and other applicable charges must also be considered.

OTM

An option is out-of-the-money when its strike price is unfavourable compared with the current market price.

For a call option:

• It is OTM when the market price is lower than the strike price.

  
  

For a put option:

• It is OTM when the market price is higher than the strike price.

  
  

For example, if a share trades at ₹500, a call option with a strike price of ₹520 is OTM. The option has no intrinsic value because buying at ₹520 would not be beneficial when the share is available in the market at ₹500.

Suppose the shares of XYZ Ltd. are trading at ₹500 each. You are comparing call options with different strike prices.

ATM option example

Suppose you buy an XYZ Ltd. call option with a strike price of ₹500 when the share is trading at ₹500.

The option is ATM because its strike price and market price are the same. At this point, it has no intrinsic value.

If the share price rises to ₹520 at expiry, the option has an intrinsic value of ₹20 per share. Your net profit or loss will depend on the premium paid and any applicable charges.

For example, if the premium was ₹8 per share, the amount remaining before charges would be:

₹20 intrinsic value − ₹8 premium = ₹12 per share

ITM option example

Suppose you buy an XYZ Ltd. call option with a strike price of ₹480 when the share is trading at ₹500.

The option is ITM because the strike price is ₹20 below the current market price. Therefore, it has an intrinsic value of ₹20 per share.

However, this does not necessarily mean that you will earn a net profit of ₹20. You must subtract the option premium and applicable charges.

For example, if you paid a premium of ₹25 per share, the ₹20 intrinsic value would still be lower than the premium paid.

OTM option example

Suppose you buy an XYZ Ltd. call option with a strike price of ₹520 when the share is trading at ₹500.

The option is OTM because the strike price is higher than the current market price. It has no intrinsic value at that point.

The option may gain value if the share price moves upwards before expiry. You may be able to sell the option at a higher premium if its market value increases.

At expiry, however, the share price must rise above the strike price plus the premium paid for the buyer to make a net profit before charges.

For example, suppose:

• Strike price: ₹520
• Premium paid: ₹6 per share

• Break-even price at expiry: ₹526 per share

  
  

If the share closes at ₹530 at expiry, the intrinsic value would be ₹10 per share. After subtracting the ₹6 premium, the amount remaining would be ₹4 per share before applicable charges.

Traders analyse option moneyness to understand the risk, cost, and possible outcome of an options position.

This classification can help you:

• Check whether an option has intrinsic value
• Compare premiums across different strike prices
• Understand the risk associated with a position
• Estimate the option’s break-even point
• Choose a strike price based on your market view

• Manage an existing options position

  
  

However, an option being ITM, ATM, or OTM does not guarantee a profit. Its final outcome also depends on the premium, price movement, time remaining until expiry, volatility, and applicable charges.

Option premiums usually differ because ITM, ATM, and OTM options do not have the same intrinsic value.

ITM options are generally more expensive because their premiums include intrinsic value.

ATM options generally have no intrinsic value, but their premiums can still be significant because of the time remaining until expiry and expected volatility.

OTM options are generally cheaper because they have no intrinsic value. However, a lower premium does not mean lower overall risk. An OTM option may expire worthless if the underlying price does not move sufficiently before expiry.

ATM, ITM, and OTM describe the relationship between an option’s strike price and the current market price of its underlying asset. ITM options have intrinsic value, while ATM and OTM options generally do not. However, moneyness alone does not show whether a trade will be profitable. You must also consider the premium paid, break-even price, time remaining until expiry, market volatility, price movement, and applicable trading charges before taking an options position.