ITM, ATM and OTM: in, at and out of the money

"Moneyness" describes where an option's strike sits compared with the current price of the underlying. It decides how much of the premium is real value and how much is hope, how strongly the option reacts to price moves, and how likely it is to be worth anything at expiry. Every option on the chain is one of three kinds: in the money (ITM), at the money (ATM) or out of the money (OTM).

The three labels for calls and puts

The rule flips between calls and puts, which is the part most beginners mix up. Take NIFTY at 25,000:

An easy way to remember it: an option is in the money if exercising it right now would give you something. The right to buy NIFTY at 24,700 when it trades at 25,000 is worth 300 points; the right to buy at 25,300 is worth nothing today.

Traders also say deep ITM or far OTM for strikes a long way from the price, and near the money for the few strikes around the ATM one. Because strikes come in steps (50 points for NIFTY weekly options, wider for BANKNIFTY), the price rarely sits exactly on a strike; the nearest strike is called ATM.

See moneyness on the live chain

Here is today's NIFTY option chain around the current price. The highlighted middle row is the ATM strike, and shaded prices are in the money:

Notice that the shading is diagonal: calls are shaded above the middle row (lower strikes) and puts below it (higher strikes). Every row has one side in the money and the other out of the money, except around the ATM row, where both are close to the line. As NIFTY moves during the day, the middle row and the shading move with it.

A worked example: three calls compared

NIFTY is at 25,000, four days before the weekly expiry. Illustrative prices and a lot of 75 units (check the current lot size on NSE):

Now suppose NIFTY rises 200 points to 25,200 by expiry:

• The ITM call is worth 500. Profit: (500 − 345) × 75 = ₹11,625, a 45% return on its cost.
• The ATM call is worth 200. Profit: (200 − 140) × 75 = ₹4,500, a 43% return.
• The OTM call is worth 0. Loss: the full ₹2,625. The trader was right on direction and still lost everything.

If instead NIFTY rallies 600 points, the OTM call turns into the star: worth 300, more than eight times what it cost. That is the OTM bargain in a sentence: a small chance of a large percentage gain, and a large chance of losing it all.

How each type behaves

• ITM options are mostly intrinsic value. They move almost point for point with the underlying (delta near 1 for calls, near −1 for puts), lose little to time decay as a share of their price, and cost the most. Buyers use them as a cheaper substitute for the underlying with a capped loss.
• ATM options are pure time value and carry the most of it in rupees. They have a delta near 0.5, the highest gamma (their delta changes fastest) and the fastest decay. They are the most liquid, with the narrowest bid-ask spreads, which is why straddle traders and most intraday traders use them.
• OTM options are cheap, react weakly to small moves, and lose value steadily if nothing happens. Sellers like them because they usually expire worthless; buyers like them for big, fast moves or as cheap insurance.

The deeper reasons are explained in the guides on intrinsic and time value and on delta.

Probability: how often each type pays

A call's delta is roughly the market's estimate of the chance it ends in the money. A delta of 0.15 means about a 15% chance, so about 85% of the time that option expires worthless. This rule of thumb is not exact, but it is a sober check on cheap options. Another check is the expected move from the straddle price:

Strikes inside the expected range are ones the market thinks NIFTY may reasonably reach by expiry; strikes far outside it are where most of the cheap OTM options sit. If you buy an option whose breakeven is well beyond this range, you are betting on a larger move than the options market is pricing.

How traders use moneyness

• Directional buyers often pick ATM or slightly ITM options to balance cost against the chance of paying off.
• Option sellers often sell OTM strikes outside the expected move and keep the premium if the price stays in range, accepting the risk of a sharp move.
• Hedgers buy OTM puts as cheap crash insurance, accepting that small falls are not covered.
• Spread traders combine strikes: buy ATM, sell OTM, to reduce cost and cap both profit and loss.

Choosing among these is covered step by step in how to choose a strike price.

Moneyness also explains why the same news hits different options differently. If NIFTY falls 300 points in the first hour, the ITM 24,700 call above loses close to 255 points (most of its intrinsic value moves with the index), the ATM call loses perhaps 100 points, and the OTM 25,300 call loses most of its small price. In percentage terms the OTM option suffers worst, even though it lost the fewest rupees. Puts work the other way round: the fall turns OTM puts into ATM ones and ATM puts into ITM ones, and their prices jump.

Common mistakes

• Mixing up call and put moneyness. A strike below the price is ITM for a call but OTM for a put.
• Buying far OTM because it is cheap. Cheap options are cheap because they rarely pay.
• Trading illiquid deep ITM strikes. Wide bid-ask gaps can cost more than the time value you saved. Check volume first.
• Forgetting that moneyness changes. A sold OTM option can turn ITM on one gap opening, with a much larger loss than its small premium suggested.
• Holding ITM stock options into expiry. They are physically settled, which can mean taking or giving delivery of shares.