In the options market, every strike price carries a different meaning for traders. The same stock price can make one option valuable while leaving another with little immediate value. The way how the strike price and the spot price (market price) are related forms the foundation of how options are interpreted in trading.
The concept of ITM vs ATM vs OTM in Call and Put Options describes the position of an option relative to the spot price of the asset involved in the contract. This classification helps the traders/investors to judge premium levels, probability of profit, and the structure of option strategies.
Read this blog to understand ITM vs ATM vs OTM in Call and Put Options, meanings, differences, and examples.
What is ITM?
In the stock market, an in-the-money (ITM) option is a condition where the option contract has an intrinsic value. In a call option contract, ITM means the market price of the asset is higher than the strike price, and in the case of a put option contract, this means the market price falls below the strike price.
For example, if the market price at which the stocks of ASD Ltd are trading is ₹120, and the strike price of the call option is ₹100, the call option is ITM because claiming it would allow buying below the market price.
What is an ATM?
At-the-money (ATM), in option trading, means an option contract whose strike price and market price (spot price) of the underlying asset are identical or quite close to each other. In this situation, the option contract has little or no intrinsic value, which means its premium consists only of time value and volatility. For example, imagine the option strike price is ₹100 and simultaneously the stock of ASD Ltd is also trading between the range of ₹100–₹102.
What is OTM?
Out-of-the-money (OTM) in options derivatives means the option contract has no intrinsic value, due to an unfavourable spot price compared to the strike price. For a call option, this situation arises when the strike price stands higher than the spot price, and for a put option, the opposite condition applies, where the strike price is lower than the prevailing market price. For example, if the market price of ASD Ltd shares is currently ₹100/share, but the call option contract has a strike price of ₹120.
Call Options
The call options provide the holder a right to purchase the asset involved in the contract at a fixed strike price before expiry.
In-The-Money (ITM) Call Option
An in-the-money (ITM) call option means the option already holds intrinsic value because the buyer can purchase the asset at a price below the market level.
For instance, if the shares of ADS Ltd are trading at the market price of ₹520 and the call option strike price is ₹500, the call is ITM since buying at ₹500 is beneficial.
At-The-Money (ATM) Call Option
At this stage, the call option has no intrinsic value, though it still contains time value until expiry.
For example, ADS Ltd is trading at ₹300, and the call option strike price is also ₹300 or say ₹301, the call option is ATM because the strike and market price are almost the same.
Out-of-The-Money (OTM) Call Option
The out-of-the-money call option is not beneficial because buying at the strike would cost more than the market price.
For example, if the stocks of ADS trade at ₹200 and the call option strike price is ₹230, the call option is OTM and has only time value.
Put Options
For put options, ITM, ATM, and OTM depend on whether the strike price is above, near, or below the market price.
In-The-Money (ITM) Put Option
An In-The-Money (ITM) put option means the option already carries intrinsic value because the holder can sell the asset at a price above the market level.
For example, the stocks of FGH Ltd trade at ₹450, and the put option strike price is ₹500; the put option is ITM since selling at ₹500 is more favourable than selling in the market.
At-The-Money (ATM) Put Option
An At-The-Money (ATM) put option means the option has no intrinsic value, though it still reflects time value before expiry.
For example, if the stocks of FGH Ltd trade at ₹300 and the put option strike price is also ₹300, the put option is considered ATM because the strike and market price are nearly equal.
Out-of-The-Money (OTM) Put Option
An Out-of-The-Money (OTM) put option means the option selling at the strike price would be less beneficial than selling at the market price.
For example, if FGH Ltd trades at ₹250 and the put option strike price is ₹220, the put option is OTM and contains only time value.
Difference between: ITM, ATM, and OTM Options
In simple terms, traders classify options as ITM, ATM, or OTM by comparing the strike price with the current market price of the underlying asset, which helps investors in analysing option pricing, probability of profit, and strategy selection before entering a trade.
| Basis | ITM | ATM | OTM |
| Meaning | The option already holds intrinsic value because exercising it would be beneficial. | The strike price is nearly similar to the spot price. | The option currently has no intrinsic value. |
| Call Option Condition | The strike price is below the market price. | The strike price is almost similar to the market price. | The strike price is above the market price. |
| Put Option Condition | The strike price is higher than the market price. | Similar strike price and market price. | Lower strike price compared to the market price. |
| Intrinsic Value | It is present because the option is already favourable. | Generally, there is no intrinsic value strike and market price is similar. | It is not present because the option is unfavourable to exercise. |
| Premium Level | Its premium stays highest because it includes intrinsic and time value. | It is moderate because it mainly reflects time value. | It is the lowest as value depends on future price movement. |
| Risk Profile | It is relatively lower because the option already carries value. | Risk is balanced risk since price movement decides the outcome. | Risk is higher because the option may expire without value. |
Conclusion
Understanding the concepts of ITM vs ATM vs OTM in Call and Put Options helps traders in interpreting how an option stands relative to the market price. This classification shows whether an option already carries intrinsic value or depends on future price movement.
By comparing strike price with the current market price, the traders can evaluate premiums, probabilities, and the role each option may play within a trading strategy.
FAQ’s
The choice primarily depends on the trader’s objective and risk tolerance. The ITM options usually cost more because they already carry intrinsic value, but they tend to move closely with the underlying asset. The OTM options are cheaper but depend entirely on price movement before expiry, which makes them more uncertain.
The ATM options have a strike price almost equal to the current market price of the underlying asset and usually contain only time value. The ITM options, on the other hand, already have intrinsic value because the strike price is favourable compared with the market price.
Assume the stocks of Infosys Ltd are trading at ₹500/share. A call option with a strike price of ₹450 is ITM because buying at ₹450 is cheaper than the market price. In contrast, a call option with a strike price of ₹550 is OTM because purchasing at ₹550 would cost more than buying the stock in the market.
The choice among ITM, ATM, and OTM depends on the individual objectives and risk tolerance. ITM options provide intrinsic value and generally move closer to the underlying asset. ATM options are sensitive to price changes around the current level. OTM options cost less but require a stronger price movement to become profitable before expiry.
