Understanding Moneyness of an Option: ITM, ATM, OTM Explained

What is the moneyness of an option?

Moneyness describes the relationship between the option's strike price and the current market price of the underlying asset. It helps traders gauge the potential profitability of an option. The three primary categories of moneyness are In-The-Money (ITM), At-The-Money (ATM), and Out-Of-The-Money (OTM).
  1. In-The-Money (ITM) Options:
    1. Call Option: It is ITM if the market price of the underlying asset is higher than the option's strike price.
    2. Put Option: It is ITM if the market price of the underlying asset is lower than the option's strike price.
  2. Out-Of-The-Money (OTM) Options:
    1. Call Option: It is OTM if the market price of the underlying asset is lower than the option's strike price.
    2. Put Option: It is OTM if the market price of the underlying asset is higher than the option's strike price.
  3. At-The-Money (ATM) Options: Both call and put options are ATM when the market price of the underlying asset matches the option's strike price. Any shift in the underlying's spot price can push this option to either ITM or OTM.
For example, consider the company Reliance Industries Limited. If the current market price of Reliance shares is ₹2,100:
  1. A call option with a strike price of ₹2,050 is In-The-Money because the market price is greater than the strike price.
  2. A put option with a strike price of ₹2,150 is In-The-Money since the market price is less than the strike price.
  3. A call option with a strike price of ₹2,200 is Out-Of-The-Money because the market price is less than the strike price.
  4. A put option with a strike price of ₹2,050 is Out-Of-The-Money since the market price is more than the strike price.
  5. Both call and put options with a strike price of ₹2,100 are At-The-Money, as the market price is equal to the strike price.
For a deeper understanding of Options, visit School of Stocks.

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