What is ITM,ATM, OTM in Option? (in the Money,at the Money,out the Money)

General
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If Nifty is presently at 8050, then 8000 Calls is called in the money (because if the option expires now, there will be an intrinsic value, Rs 50 in this case), 8050 calls is at the money( no intrinsic value, but strike price and market price same) and 8100 call is called out of the money because it has no intrinsic value.

Similalry, 8100 puts is ITM, 8050 Puts is ATM, and 8000 puts is OTM

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  • In-the-money option: An in-the-money (ITM) option is an option that would lead to a positive cash flow to the holder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price.
  • At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is at-the-money when the current index equals the strike price (i.e. spot price = strike price).
  • Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negative cash flow it were exercised immediately. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price.

This is the extract from the NCFM Equity Derivative module.

For ATM, you can call it ATM in normal terms, if the spot price is in and around strike price, say 8050 calls when the spot price is around 8049.5 or 8050.5 since, the index will be fluctuating. Ideally it has to be equal, but you can consider those as ATM.

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Thanks for the answer. But, I feel that the terminology used, such as “exercised immediately” is not correct (please correct me if I am wrong). You cannot exercise an option before expiry as these are European Type options. You can only square off the open positions anytime before expiry.

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Technically,

  In-the-money At-the-money Out-of-the-money
Call Option Option Strike Price < Underlying Market Price Option Strike Price = Underlying Market Price Option Strike Price > Underlying Market Price
Put Option Option Strike Price > Underlying Market Price Option Strike Price = Underlying Market Price Option Strike Price < Underlying Market Price

For more, You can refer these resources:-

http://www.investopedia.com/terms/a/atthemoney.asp

http://justtrading.in/getting-started-with-trading-how-to-trade-options/

http://www.call-options.com/definition/at-the-money.html

Happy Trading

Mohan.

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Lovely explanation, @AastroGuru … Thanks…

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In English “if it were exercised immediately” means hypothetically thinking what if that happens (it could not happen in real). Please check Wren & Martin, High School English Grammar under "Subjunctive Mood"
The Past Subjunctive is used after if, to express improbability or unreality in the present
Example
If I were you I should not do that. (but I am not you, and never can be)
If it were exercised immediately ITM would lead to a positive cash flow to the holder (ITM cannot be exercised immediately, it can only be exercise on expiry, improbable)
Edit:
If you are conveying a message, post it as a comment please, not as an answer. Thanks

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Both Astroguru and Nithin sir have explained beautifully, Nithin sir has explained with an example and Astroguru with the defination.
Thanks to both of them

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According to varsity,

Nifty Spot – 7846

ATM – 7800 CE, premium – Rs.79/-

OTM – 7900 CE, premium – Rs.25/-

here at this page

I was of the opinion that 7800CE is ITM, 7850 ATM .
Someone clarify plz!