Difference Between ITM, OTM, ATM in Call and Put Options

In the world of options trading, understanding the relationship between the strike price and the current market price is essential. This is where terms like In-the-Money (ITM), Out-of-the-Money (OTM), and At-the-Money (ATM) come into play. These classifications help traders assess the value, risk, and profit potential of both call and put options.

Before exploring ITM, OTM, and ATM, it’s important to grasp the basics of options.

• Call Option: Gives the buyer the right to buy an asset at a specific price before expiry.
  

• Put Option: Gives the buyer the right to sell an asset at a specific price before expiry.

The strike price is the agreed-upon price at which the buyer may exercise the option.

These terms refer to the moneyness of an option—whether exercising it would currently result in a profit or not.

Moneyness helps in assessing the potential payoff and risk exposure of an option.

Understanding how ITM, OTM, and ATM apply to call options helps clarify potential profitability and risk:

Example (NIFTY at ₹18,000)

Here’s how these option types play out:

• ITM Call: Strike = ₹17,800 → Profitable
  

• ATM Call: Strike = ₹18,000 → Breakeven
  

• OTM Call: Strike = ₹18,200 → Not profitable

An ITM call is more expensive but has a higher chance of yielding returns.

Let’s explore how these terms apply specifically to put options and what they signify for traders:

Example (NIFTY at ₹18,000):

• ITM Put: Strike = ₹18,200 → Profitable
  

• ATM Put: Strike = ₹18,000 → Neutral
  

• OTM Put: Strike = ₹17,800 → Not profitable

An ITM put is costlier due to its inherent value, but useful in bearish scenarios.

Understand the differences between ITM, ATM, and OTM options:

Premium differences are as follows:

Traders often use ATM options for quick trades and ITM options for better probability of success.

Strategic use of these options is as follows:

Scenario-Based Usage:

• Bullish View → Buy ITM or ATM Call
  

• Bearish View → Buy ITM or ATM Put
  

• Breakout Anticipation → Buy ATM options
  

• Cheap Hedge → Buy OTM Put (if holding equity)
  

As expiry approaches, time value erodes, making:

• ITM options retain most of their premium
  

• ATM options lose value fastest
  

• OTM options approach zero value

Hence, choosing the right moneyness becomes crucial as expiry nears.

Understanding the difference between ITM, ATM, and OTM options is essential for every trader. It not only determines the risk-reward ratio but also impacts premium pricing, time decay, and strategy selection. Whether you're hedging, speculation, or seeking directional trades, choosing the correct moneyness can significantly affect the outcome of your options trade.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.