Updated Mar 24, 2022

What is (ATM)?, (OTM)?, (ITM)?

What is (ATM)?, (OTM)?, (ITM)?

Moneyness Options

Moneyness is about striking the option's price concerning the present or current trade price of essential assets or property. It is, therefore, about the intrinsic value of some option when that option is in its current state. Traders categorise the options into three classes depending on the relationship of the underlying stock to the strike price at the current time. These categories thus describe the moneyness of an option.

The options strategy incorporates the terms given, and if one does not have a great hold of them or have a great understanding of the same, it might be difficult and confusing for the beginners. So here are three types of moneyness options:

• At- The- Money (ATM)
• Out- Of- The- Money (OTM)
• In- The- Money (ITM)

These three categories have two different types, depending on call options and put options. Call options are the ones that give the holder the liberty or right to purchase a stock, while the put options are the ones that give the holder the liberty or right to sell a stock.

Intrinsic Value

We need to know about the intrinsic value before a deep understanding of the three categories of moneyness options. The Intrinsic value refers to the amount which leads to the strike price of any option in the money. The money and out of the money do not have any intrinsic value.

Call Options: Intrinsic value = Underlying Stock's Current Price - Call Strike Price

Time Value = Call Premium - Intrinsic Value

Put Options: Intrinsic value = Call Strike Price - Underlying Stock's Current Price

Time Value = Put Premium - Intrinsic Value

Time Value

Extrinsic value is also called the time value. It refers to the excess amount which is over and above the intrinsic value of an option. Extrinsic value reduces to as low as zero when the option's expiration date comes closer. This situation is referred to as time decay.

The Categories

The current stock price and the option strike price determine the three categories, which are given as follows:

• At- The- Money (ATM)

Options can be defined as At-The-Money (ATM) at the time when the strike price and stock price both are at an equal level. This helps describe a price level parity between the prices of the strike and stock. At-The-Money is bound to have some time value but no intrinsic value.

• At- The- Money Call option

At- The- Money (ATM) call option is the one where the underlying assets' strike price is almost equal to the spot price.

• At- The- Money Put option

At- The- Money (ATM) put option is where the underlying assets' strike price is almost equal to the spot price.

• Out- Of- The- Money (OTM)

Options can be defined as Out- Of- The- Money (OTM) based on the current relationship between the stock price and the strike price. It does not specify the loss of money for a trader. Out- Of- The- Money is bound to have some time value but no intrinsic value.

• Out- Of- The- Money Call option

Out- Of- The- Money (OTM) call option is the one where the underlying assets' spot price is lower than the strike price.

• Out- Of- The- Money Put option

Out- Of- The- Money (OTM) put options are where the underlying assets' spot price is higher than the strike price.

• In- The- Money (ITM)

Options can be defined as In-The-Money (ITM) based on the position of the stock price compared to strike price at one specific time. It does not specify the profit for a trader all the time. In- The- Money is bound to have intrinsic and time value.

• In- The- Money Call option

In-The-Money (ITM) call option, the underlying assets' spot price is higher than the strike price.

• In- The- Money Put option

In-The-Money (ITM) put option, the underlying assets' current price is lower than the strike price.

Conclusion

The mastering of trading options requires the fundamental concept of single options contracts as moneyness. Moneyness might become more complex when sophisticated options strategies are added to the mix, and therefore it becomes much more important to have an established understanding. Thus the categories become equally imperative.