Understanding the distinctions between in-the-money (ITM), out-of-the-money (OTM), and at-the-money (ATM) options is essential for any trader navigating the world of options. These terms—collectively known as moneyness—define the relationship between an option’s strike price and the current market price of the underlying asset. Whether you're trading call or put options, knowing how moneyness impacts value, risk, and potential profit can significantly improve your trading decisions.
What Are Call and Put Options?
Options are financial derivatives that give traders the right—but not the obligation—to buy or sell an underlying asset at a predetermined price, known as the strike price, before or on a specific expiration date.
- A call option grants the holder the right to buy the underlying asset.
- A put option grants the holder the right to sell the underlying asset.
The profitability of these options hinges on where the market price stands relative to the strike price. This is where the concepts of ITM, OTM, and ATM come into play.
Understanding Moneyness: ITM, OTM, and ATM
In-the-Money (ITM) Options
An option is in-the-money (ITM) when exercising it immediately would result in a profit, excluding the premium paid.
- For call options: The market price is above the strike price.
Example: Stock trades at $110; call option strike = $100 → ITM by $10. - For put options: The market price is below the strike price.
Example: Stock trades at $90; put option strike = $100 → ITM by $10.
ITM options have intrinsic value, calculated as:
Intrinsic Value = |Market Price – Strike Price|
They also carry time value, but their higher premiums reflect immediate profitability potential.
👉 Discover how real-time data can help you spot ITM opportunities faster.
At-the-Money (ATM) Options
An option is at-the-money (ATM) when the strike price equals the current market price of the underlying asset.
- Example: Stock price = $100; strike price = $100 → ATM.
ATM options have no intrinsic value, only time value. However, they are highly sensitive to price movements and often experience rapid changes in delta and theta. Traders use ATM options when expecting high volatility or short-term directional moves.
Out-of-the-Money (OTM) Options
An option is out-of-the-money (OTM) when exercising it now would yield no profit.
- For call options: Market price < strike price
Example: Stock = $95; strike = $100 → OTM - For put options: Market price > strike price
Example: Stock = $105; strike = $100 → OTM
OTM options have zero intrinsic value—their entire premium consists of time (extrinsic) value. While cheaper than ITM options, they require significant price movement to become profitable before expiration.
Key Factors Influencing Option Moneyness
Market Price Movement
The most direct factor affecting moneyness is the fluctuation in the underlying asset’s price. As prices rise or fall, options shift between ITM, ATM, and OTM statuses.
For instance:
- A call option that starts OTM can become ATM or even ITM if the stock surges.
- Conversely, a deep ITM call may lose intrinsic value if the stock drops sharply.
This dynamic nature means traders must monitor positions closely, especially near expiration.
Time Decay (Theta)
Time decay erodes an option’s extrinsic value as expiration approaches. This affects all options but hits OTM and ATM options hardest because they rely entirely on time value.
- OTM options: Most vulnerable—can expire worthless.
- ITM options: More resilient due to intrinsic value, but still lose time premium.
- ATM options: Experience accelerated time decay in the final days.
Understanding theta helps traders decide whether to hold, roll, or close positions.
👉 Learn how advanced analytics can help you manage time decay more effectively.
Advantages and Risks of ITM Call Options
Why Traders Choose ITM Calls
- Higher Probability of Profit: Since ITM calls start with intrinsic value, they’re more likely to finish profitably if the trend continues.
- Leverage with Lower Risk: Compared to buying stock outright, ITM calls offer exposure to larger positions with less capital.
- Strong Delta Response: ITM options typically have a delta close to 0.7–0.8, meaning they respond strongly to upward price moves in the underlying asset.
Potential Downsides
- Higher Premium Cost: ITM options are more expensive due to intrinsic value.
- Time Decay Still Applies: While less vulnerable, they’re not immune to theta erosion.
- Assignment Risk: If short an ITM call (e.g., in a covered call strategy), early assignment is possible.
Trading Strategies Involving Moneyness
1. Buying ITM Calls for Bullish Outlooks
Ideal for traders confident in a moderate-to-strong upward move. Offers better downside protection than OTM calls due to intrinsic value.
2. Selling Covered Calls (Using ITM or ATM)
Investors holding stock can sell ITM or ATM call options to generate income. While ITM covered calls yield higher premiums, they increase the likelihood of shares being called away.
3. Using OTM Options for High-Reward Bets
OTM options are popular for speculative plays. Low cost allows for diversified bets on breakout moves, earnings reactions, or macroeconomic events.
Real-World Example: ITM Call Trade in Indian Markets
Suppose Reliance Industries (RIL) trades at ₹2,500. A trader buys an ITM call option with a strike price of ₹2,400 expiring in one month.
| Scenario | Stock Price at Expiry | Option Value | Profit/Loss (Excl. Premium) |
|---|---|---|---|
| Bullish Move | ₹2,600 | ₹200 | ₹100 gain |
| Sideways | ₹2,500 | ₹100 | Breaks even (after premium) |
| Bearish Move | ₹2,300 | ₹0 | Loss = premium paid |
This illustrates how ITM calls perform under different market conditions—profitable if the asset rises, but still subject to loss if expectations aren’t met.
Frequently Asked Questions (FAQs)
What determines the intrinsic value of an ITM call option?
The intrinsic value of an ITM call option is calculated as the difference between the current market price of the underlying asset and the option’s strike price. For example, if a stock trades at $120 and the call option has a $110 strike, the intrinsic value is $10.
How does volatility affect ITM call options?
Higher implied volatility increases the premium of ITM call options due to greater uncertainty about future price movements. While intrinsic value remains unchanged, elevated volatility boosts extrinsic value, especially for longer-dated contracts.
Can ITM call options expire worthless?
Yes, though unlikely. If the underlying asset’s price drops below the strike price before expiration, an ITM call can become OTM and expire worthless if not exercised.
What is the role of delta in ITM options?
Delta measures how much an option’s price changes per $1 move in the underlying asset. ITM call options typically have a delta between 0.7 and 0.95, indicating strong correlation with stock movement—ideal for directional bets.
Why choose an OTM option over an ITM one?
OTM options are cheaper and offer higher percentage returns if the underlying makes a large move. They suit traders seeking high-reward speculation with limited capital.
How do ATM options behave near expiration?
ATM options experience rapid time decay in the final days. Their value collapses quickly unless there's a sharp move in the underlying asset. Traders often avoid holding ATM options into expiry unless anticipating volatility spikes.
Final Thoughts
Mastering the differences between ITM, OTM, and ATM options empowers traders to build smarter, more adaptive strategies. Each moneyness level serves a unique purpose—whether it’s capitalizing on intrinsic value with ITM calls, leveraging low-cost speculation via OTM plays, or exploiting volatility with ATM instruments.
By aligning your choice of strike price with market outlook, risk tolerance, and time horizon, you can optimize both reward potential and capital efficiency.