What Is Moneyness in Options? (ITM, ATM, OTM Explained)

What Is Moneyness in Options? (ITM, ATM, OTM Explained)

Moneyness tells you where an option’s strike price sits relative to the current price of the underlying. It answers: “If expiry were right now, would this option have intrinsic value?”
It’s purely a price relationship—not a view on whether the trade is good or bad.

Quick definitions

• In the Money (ITM)
  Has intrinsic value right now.
  • Call: Spot S > K (e.g., NIFTY at 22,050; call strike 22,000).
  • Put: Spot S < K (e.g., NIFTY at 21,950; put strike 22,000).
• At the Money (ATM)
  Strike is closest to spot. Intrinsic value ≈ 0, time value is max.
  • Call/Put: K ≈ S (e.g., NIFTY ~22,000; 22,000 strike is ATM).
• Out of the Money (OTM)
  Has no intrinsic value right now (only time value).
  • Call: S < K (e.g., NIFTY 22,000; call strike 22,200).
  • Put: S > K (e.g., NIFTY 22,000; put strike 21,800).

Intrinsic value formulas:
Call = max(0, S − K)
Put = max(0, K − S)
Option premium = Intrinsic value + Time value

A clean example

Assume NIFTY spot S = 22,000.

• If the 22,100 call trades at ₹120 and S = 22,000:
  Intrinsic = max(0, 22,000 − 22,100) = 0 → OTM; entire ₹120 is time value.
• If later S jumps to 22,180, the same 22,100 call becomes ITM with intrinsic ≈ 80. (Premium will reflect intrinsic + remaining time value.)

Why moneyness matters

1. Premium levels
   • ITM options are costlier (include intrinsic value).
   • OTM options are cheaper (pure time value).
   • ATM options usually command the highest time value.
2. Greeks behavior (typical ranges)
   • Delta measures sensitivity to price moves.
     • ITM call: ~ 0.60 → 1.00 (moves almost like the underlying when deep ITM)
     • ATM call: ~ 0.50
     • OTM call: ~ 0.00 → 0.40
     • (Puts have negative delta with similar magnitudes.)
   • Gamma (rate of change of delta) is highest near ATM.
   • Vega (sensitivity to IV) is largest near ATM.
   • Theta (time decay) bites hardest near ATM as expiry approaches.
3. Probability flavor
   • ITM options have a higher chance to expire with value than OTM ones.
   • Practically, many traders use delta as a quick proxy (with caveats) for probability of finishing ITM near expiry (strictly speaking it’s closer to a model-derived quantity; treat it as an approximation, not a literal probability).
4. Strategy selection
   • Directional & high-conviction: ITM options (higher delta, less slippage to time decay per unit of delta).
   • Lottery-style moves: OTM options (cheap but lower probability).
   • Income/neutral: Selling OTM options (relying on time decay), hedged as needed.

ATM is a band, not a razor-thin line

Before expiry, traders treat ATM as the strike closest to spot; some use a small band (e.g., within ±0.5–1% of spot) as “near-ATM”. On expiry, classification is crystal-clear:

• ITM if it has positive intrinsic value at the final settlement price.
• ATM/OTM expire worthless (no intrinsic value).

(In India, index options like NIFTY/BANKNIFTY are European-style and cash-settled at expiry; ITM options settle to their intrinsic value.)

Time to expiry changes the feel of moneyness

• Far from expiry: OTM options can still carry sizeable premiums if implied volatility is high (there’s time for the move).
• Near expiry: OTM premiums collapse quickly; ATM time value shrinks fast; ITM premiums converge to intrinsic value.

Forward moneyness (advanced but useful)

Sometimes pros compare strike to the forward price F (spot adjusted for carry/dividends).

• Forward moneyness uses K / F (or log-moneyness ln(S/K)) and is common on volatility surfaces.
• Practically, for short-dated Indian index options with modest rates/dividends, spot-based moneyness works fine for most traders.

Break-even at expiry (handy to know)

• Long Call break-even = K + premium paid
• Long Put break-even = K − premium paid

Example: Buy NIFTY 22,000 call at ₹150 → Need S > 22,150 at expiry to break even.
Buy NIFTY 22,000 put at ₹140 → Need S < 21,860 at expiry to break even.

FAQ-style clarifications

• Does moneyness change during the day?
  Yes. As price moves, the same strike can flip from OTM → ATM → ITM (or vice versa).
• Is an ATM option always the best to buy?
  Not always. ATM gives you the most bang per rupee in gamma/vega, but it also decays fastest. Your market view (direction, speed, and timing) decides.
• Why is an ITM call sometimes “cheaper” risk-wise than an OTM call?
  Per unit of delta exposure, ITM options can be more efficient (higher delta, less time value), so less sensitive to IV and decay than a similarly priced OTM.

A simple workflow to classify quickly

1. Note spot (S) (e.g., NIFTY = 22,000).
2. Pick strike (K).
3. Call: ITM if S > K, ATM if ≈, OTM if S < K.
   Put: ITM if S < K, ATM if ≈, OTM if S > K.
4. Check premium: split into intrinsic (per formulas) and time value.
5. Align with your view & Greeks (delta for direction, theta for decay, vega for IV view)