ITM vs. ATM VS. OTM in Options Trading
ITM (In-The-Money) options and ATM (At-The-Money) options differ in their intrinsic value and how they can be used in trading.
Key Takeaways
ITM (in-the-money) and ATM (at-the-money) are terms used to describe the relationship between an option's strike price and the price of the underlying asset.
An ITM option is one where the strike price is below (for a call option) or above (for a put option) the current price of the underlying asset.
An ATM option is one where the strike price is approximately equal to the current price of the underlying asset.
An OTM (out-the-money) option has no intrinsic value
ITM options are generally more expensive than ATM options due to their intrinsic value.
ITM vs. ATM Options
ITM options have intrinsic value and a higher probability of being exercised, while ATM options have no intrinsic value and a lower probability of being exercised.
What is an ITM Option?
ITM options are options that have intrinsic value, which means that the option's strike price is favorable to the underlying asset's price.
ITM Option Example
For example, if the underlying asset is a stock trading at $50 and the call option strike price is $45, the option is considered ITM (in-the-money).
This is because the option holder has the right to buy the stock at $45 while the stock is trading at $50, giving the holder a $5 profit. ITM options tend to have a higher premium than other options and are considered to have a higher probability of being exercised.
What is an ATM Option?
ATM options, on the other hand, have no intrinsic value. They are options with a strike price equal to the current market price of the underlying asset.
ATM Option Example
For example, if the underlying asset is a stock trading at $50 and the call option strike price is $50, the option is considered at-the-money.
This means that the option holder has the right to buy the stock at the current market price, so the holder doesn't have any profit or loss. ATM options have the highest amount of extrinsic value.
What is an OTM Option?
OTM (Out-of-The-Money) options are a type of options that differ from ITM (In-The-Money) and ATM (At-The-Money) options in terms of intrinsic value and how they can be used in trading.
OTM Option Example
OTM options are options with no intrinsic value, meaning that the option's strike price is not favorable to the underlying asset's price. For example, if the underlying asset is a stock trading at $50 and the call option strike price is $55, the option is considered out-of-the-money.
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