What are ATM, ITM & OTM Options?

Listen audio version

If you’ve ever taken an investing class or looked at your cousin’s stock portfolio, you’ve probably heard the terms ATM, ITM, and OTM mentioned.  

These acronyms can be a little confusing at first (especially when it seems like everyone is using different definitions), but it’s not too hard to figure out.

In this post, I will be getting into what the terms mean and how they differ with example scenarios to clarify the matter.

But, before we get into these terminologies, let’s go over the intrinsic and extrinsic values necessary for comprehending the ATM, ITM, and OTM alternatives.

As an options trader or a new options trader, it’s important to know the difference between intrinsic and extrinsic value.

There are two parts to the price of an option: its intrinsic value (also called its “intrinsic” value) and its extrinsic value (its “extrinsic” value).

If you want to be a good options trader, you need to know this relationship. Understanding this relationship is very important to know how options prices work.

This difference between the two components of price is essential in options trading because these two parts are often the reason that an option is more or less expensive than another option.

What is Intrinsic Value?

An option’s theoretical value, if exercised immediately, is called intrinsic value. The intrinsic value of an asset is a measure of its worth. It is the actual market value.

The intrinsic value of an option is calculated using the following formula:

Intrinsic Value of a Call Option = (Spot Price – Strike Price)

Intrinsic Value of a Put Option = (Strike Price – Spot Price)

The intrinsic value is never negative and is always positive.

Let’s look at an example to better comprehend intrinsic value:

extrinsic value intrinsic value
Source: NSE

As indicated in the above image, the Nifty Spot Price is 16250, while the strike price of 16000 CALL Option is trading with a premium of Rs. 402 (round figure).

Intrinsic Value = (Spot Price – Strike Price) 

= 16250 – 16000

= 250

The intrinsic value is Rs. 250 in this case.

What is extrinsic value?

The extrinsic value of an option is determined by the difference between its market price (also known as the premium) and its intrinsic price.

It’s also known as time value, which depreciates every day.

Extrinsic Value = (Option Premium – Intrinsic Value)

Let’s look at an example to better comprehend intrinsic value:

extrinsic value
Source: NSE

As indicated in the above image, the Nifty Spot Price is 16250, while the strike price of 16000 CALL Option is trading with a premium of Rs. 402 (round figure).

Extrinsic Value = (Option Premium – Intrinsic Value)

                          = 402- 250

                          = 152

The extrinsic value is Rs. 152 in this case.

Option Categories:

Options are classified according to their moneyness of strike into three categories:

1. At-The-Money (ATM),

2. In-The-Money (ITM) , and

3. Out-Of-The-Money (OTM)

What are ATMs?

ATM means “at the money.” There is nothing else to say about this.

When something is “at money,” that means that the option’s value is the same as its strike price.

ATMs are the most simple and easy to understand out of all the different types of money.

With ATM options, there is no intrinsic value involved. 

atm option
Source: NSE

For example, if the Nifty Spot Price is 16250, then the Nifty 16250 (strike price) Call Option is ATM, and so is the Nifty 16250 Put option.

What are ITMs?

ITM stands for “in the money.” 

A call option is ITM if the stock price is higher than the strike price.

On the other hand, a put option is ITM if the stock price is lesser than the strike price.

ITM options have both extrinsic and intrinsic value at the time of purchase, but only intrinsic value remains at the time of expiration. 

Itm options have the best chance of succeeding, but they are also the most expensive. Purchasing ITM options does not guarantee that you will profit.

itm option
Source: NSE

For example, If the Nifty Spot Price is 16250,

Then the strikes below 16250, such as 16200, 16150, 16100, 16050, 16000 etc. are ITM call options.

as well as

Strikes above 16250, such as 16300, 16350, 16400 etc. are considered ITM Put options.

What are OTM options?

OTM stands for “out of the money. ” When something is out of the money, an intrinsic value is equal to zero.

A call option is OTM if the stock price is lower than the strike price.

On the other hand, a put option is OTM if the stock price is more than the strike price.

otm option
Source: NSE

For example, If the Nifty Spot Price is 16250,

Then the strikes above 16250, such as 16300, 16350, 16400 etc. are OTM call options. 

and, 

The strikes below 16250, such as 16200, 16150, 16100, 16050, 16000 etc. are OTM Put options. 

OTM options are less expensive, but they have a lower possibility of success.

Key takeaways

  1. ATM and OTM options have no intrinsic value.
  2. ATM and OTM options only have Extrinsic or time value.
  3. ITM options have Intrinsic and Extrinsic Value.

I hope you can now distinguish between ATM, ITM, and OTM options.

However, if you have any questions, please ask them in the comments section below!

Disclaimer: This article is for educational purposes only and should not be considered as financial advice or a recommendation of any kind. The author of this piece does not guarantee its accuracy.
Always consult a financial advisor and do your research before trading or investing in any market!
Sharing is caring ❤

I'm a Blogger, Writer, and speaker. In my blog, I talk about things that work in real.

Leave a Comment