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

In options trading, terms like ITM (In the Money), ATM (At the Money) and OTM (Out of the Money) are part of everyday conversation for any trader. But if you are new to options trading, it is very important to understand the meaning of these three terms and know the difference between them, because they determine the value and risk of an option.

In this blog, we will learn about what ITM,OTM, and ATM options are and most importantly, how their definition differs in the context of Call Options and Put Options.

What is a Call Option?

A call option is a derivative contract that grants the buyer the right, but not the obligation, to purchase a stock or other asset at a predetermined strike price on or before a specified expiration date. Traders usually buy call options when the price of a stock is expected to rise. In this case, if the stock’s market price rises above the strike price, the option becomes “in the money” and starts generating profits.

The value of a call option comprises of two things:

• Intrinsic Value (if ITM)
• Time Value (decreases over time)

What are ITM, ATM and OTM in Call Option?

When you buy or sell a Call Option, its value depends on the difference between its strike price and the current market price (spot price). Three terms are used to understand this difference: In the Money (ITM), At the Money (ATM), and Out of the Money (OTM). Let us understand these three terms in detail in the context of Call Option:

In The Money (ITM) – Call Option

When the strike price of a Call Option is less than the current price (spot price) of the stock, then that option is considered In the Money (ITM). In this case, the option has intrinsic value because exercising it immediately would allow the buyer to purchase the stock below its market price, resulting in a profit.

Example : If Reliance stock is trading at ₹1,500 and you have a Call Option of strike price ₹1,450, then the call is said to be ITM.

At The Money (ATM) – Call Option

When the strike price and the current price of the stock are almost equal, the option is said to be At the Money (ATM). In this situation, the option has little to no intrinsic value and consists primarily of time value, meaning its worth is derived mainly from the time remaining until expiration and the potential for favorable price movement.

Example: Reliance stock is at ₹1,500 and you hold a Call Option of ₹1,500, then it is an ATM call option.

Out of The Money (OTM) – Call Option

When the strike price is higher than the current price of the stock, the call option is said to be out of the money (OTM). In this case, the option has no intrinsic value, and its value is based only on its time value. If the stock price does not rise over strike price by expiry, the option will expire worthless.

Example : If Reliance is at ₹1,500 and you have taken a call option of ₹1,700, then it is OTM.

If you are trading in call options, it is important to understand these three moneyness conditions as they determine how quickly your position can become profitable or expire worthless.

What is a Put Option?

Put Option is a derivative contract that gives the buyer the right to sell a stock or asset at a specified strike price by a specified expiry date. Whether to exercise this right or not is entirely up to the buyer. Buying a Put Option is beneficial when the price of a stock or asset price is expected to fall. If the market price goes below the strike price, the option becomes “In the Money” and the buyer starts getting profit. Put Options are often used to hedge existing portfolios or make speculative profits from a falling market.

Example: If Nifty is trading at 25,000 and you have bought a Put Option of strike price 25,500, then this option will be ITM because you have the right to sell at a higher price than the market.

What are ITM, ATM and OTM in Put Option?

The value of Put Options depends on where its strike price stands in comparison to the current market price (spot price). To understand this, we use three terms – In the Money (ITM), At the Money (ATM), and Out of the Money (OTM).

Below we will understand what these three conditions mean in the context of Put Option and how they affect trading:

In The Money (ITM) – Put Option

A put option is considered In the Money (ITM) when its strike price is higher than the current market price (spot price) of the underlying stock. In this case, the option has intrinsic value because exercising it immediately would allow the seller to sell the stock at a price above its current market value, resulting in a profit.

Example: Suppose a stock is trading at ₹1,900 and you have a Put Option of strike price 2,000 – then it will be ITM.

At The Money (ATM) – Put Option

When the strike price and the current market price are almost equal, the option is said to be At the Money (ATM). In this case, the option has no intrinsic value, only time value.

Example : The stock is at ₹1,900 and you bought a Put Option for ₹1,900 then it is called ATM.

Out of The Money (OTM) – Put Option

When the strike price is lower than the current price of the stock, the Put Option is said to be Out of the Money (OTM). OTM puts have no intrinsic value. However, OTM puts can still have time value, which reflects the potential for the stock price to drop below the strike price before expiration, giving the option a chance to become profitable.

Example : Stock is trading at ₹1,900 and you have a Put Option at ₹1,800 then it is OTM.

Understanding the moneyness of Put Options is important because it determines how much profit you can make in a falling market and with how much risk. Knowing the difference between ITM, ATM, OTM is very important for smart trading decisions.

Read Also: Call and Put Options: Meaning, Types, Difference & Examples

Difference Between ITM, ATM and OTM Options

Criteria	In the Money (ITM)	At the Money (ATM)	Out of the Money (OTM)
Meaning	Call: Strike Price < Spot Price Put: Strike Price > Spot Price	The strike price is nearly equal to the current market price.	Call: Strike Price > Spot Price Put: Strike Price < Spot Price
Intrinsic Value	Present	Exists to a minimal extent (effectively zero).	Absent
Option Premium	Highest (intrinsic + time value).	Moderate (primarily time value).	Lowest (only time value).
Time Decay Impact	Less impact (mostly intrinsic value)	Highest impact (purely time value)	Rapid decay if stock price doesn’t move in favourable direction
Use Case	Conservative trading approach	To profit from quick moves	Speculative bets, breakout trades

Common Mistakes Traders Make in Understanding ITM, ATM, and OTM

Some of the common mistakes traders should avoid while trading ITM, OTM and ATM options are listed below:

• Underestimating risks of OTM options as they are cheaper : Many new traders buy OTM options because of their lower premium. But they forget that lower prices does not always mean higher profits. OTM options do not have intrinsic value, and if the price does not move till expiry, the entire premium can become zero.
• Ignoring Theta Decay : ATM and OTM options lose value the fastest because their entire premium is based on time value. Especially near expiry, their value decreases rapidly – what we call theta decay. Without favorable price movement, these options can quickly become worthless.
• Not understanding Risks while selling ITM options : Many traders sell ITM options without knowing that if the option is ITM near expiry, they may have to deliver the underlying asset (physical settlement). 
• Not tracking the Spot Price : To correctly understand the moneyness of the option (ITM/ATM/OTM), it is important to look at the real-time spot price. Many times traders make decisions based on the future price, which can lead to wrong strike selection and result in losses.

Read Also: Option Chain Analysis: A Detail Guide for Beginners

Conclusion

ITM, ATM and OTM options are not just technical terms, they are the foundation of option trading. Whether you buy or sell a Call or a Put, understanding the moneyness can be the difference between profits and losses. In options trading, predicting the correct direction is only half the battle. Choosing the right strike price is equally crucial. It is essential to choose between ITM, OTM, and ATM options based on the risk-reward ratio of your trading strategy and your overall risk management approach. It is advised to consult a financial advisor before trading options.