Options: What is ATM, ITM, OTM?

The difference between underlying securities current spot price and strike price represents the profit/loss that the trader makes upon sale or exercise of the option.

Nov 07, 2017 07:11 IST others Jayesh Bhanushali |

The strike price is the price at which a buyer of a call option can buy the security while for put options it is the price at which the security can be sold. The strike price is fixed in the contract and does not fluctuate with any change in the underlying script.

The strike prices are decided by the exchange based on the volatility in the underlying script which previously was decided based on the denomination of the script.

The difference between underlying securities current spot price and strike price represents the profit /loss that the trader makes upon sale or exercise of the option.

ITM Options (In the money options)
a) A call option is said to be in ITM if the strike price is less than the current spot price of the security.
I.e. Spot- Strike > 0
b) A put option is said to be ITM if the strike price is more than the current spot price of the security.
I.e. Spot- Strike < 0

ATM Options (At the money options)
a) A call option is said to be in ATM if the strike price is equal to the current spot price of the security.
I.e. Spot- Strike = 0
b) A put option is said to be ATM if the strike price is equal to the current spot price of the security.
I.e. Spot- Strike = 0

OTM options (Out of the money options)
a) A call option is said to be in OTM if the strike price is more than the current spot price of the security.
I.e. Spot- Strike < 0
b) A put option is said to be OTM if the strike price is less to the current spot price of the security.
I.e. Spot- Strike > 0
 
Let us consider an example to understand it better.

Nifty is currently trading at 10400 in the spot market.
Strikes Call Option Put Option
10000 ITM OTM
10100 ITM OTM
10200 ITM OTM
10300 ITM OTM
10400 ATM ATM
10500 OTM ITM
10600 OTM ITM
10700 OTM ITM
18000 OTM ITM
 
Note: Short-term momentum trader can select any of the strike prices to trade in, however trading in ATM most favorable.

Related Story