In-the-Money, At-the-Money, and Out-of-theMoney Options

All options have an underlying asset, such as a stock, an exchange-traded fund, or a future, the values of which change over time. The value of an option, therefore, also change along with the underlying asset. Depending on the price of the underlying asset, an option can be in-the-money, outof-the-money, or at-the-money situation. Each of these situations offers an intrinsic value to the option.

In-the-Money (ITM) Option

ITM option contracts have an intrinsic value.

  • If a call option that offers the buyer the right to buy an asset at a set price before a deadline has an underlying asset the price of which is higher than the agreed-upon price, the call option is an ITM. The price at which the asset can be sold is known as the "strike price".

  • Conversely, in case of a put option, if a seller of the option has the right to sell the option at a lower price than the agreed price before a deadline, it is known as ITM. In other words, for a put option, the strike price is lower than the agreed price of the option.

At-the-Money (ATM) Option

If the strike price of an option is equal to the agreed-upon price, the call option is called at-the-money. For example,

  • If the price of the underlying asset of a call option is INR 100, while the agreed-upon price is also the same, the option is called at-themoney.

  • Similarly, if the put option could be sold at a price that is the same as that of the agreed-upon price, it is an ATM.

The intrinsic value of an ATM is zero, as no profit can be derived from it. In general, no investor would be interested in call and put options that are ATM. However, the owners of ATMs may hold the options in hope that the strike prices will go up in the future.

Out-of-the-Money (OTM) Option

An out-of-the-money call option is one that has a strike price less than the agreed-upon price. The assets underlying an OTM call option has a lower price than the pre-set price, so the investors will not exercise the OTM option, as no profit or income could be obtained from it.

Similarly, if a put option is OTM, the strike price of the assets underlying it can only be sold at a lower price than the agreed-upon price of the assets underlying it. OTM options have a negative intrinsic value and it is taken as zero value, as intrinsic values cannot be negative in practice.