What is the concept of In the money, At the money and Out of the money in respect of Options?

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Hi Sunil, in simple terms… very simple terms, When you making money in options it is called IN THE MONEY, When you are at a neutral position (i.e not winning or losing money) you are AT THE MONEY, when your position is negativly away from the current maket price… you sir are OUT OF THE MONEY. : )

for example…

If Nifty is presently at 6600, and you had bought a 6500 call earliar, you are ITM (In The Money). You are making a profit on 100 points of Nifty.

If Nifty had not moved 100 points and remained as 6500, you are ATM ( At The Money) - No win no loss!

If Nifty had gone lower to the position you held, say Nifty dipped to 6400 and you were unfortunate to buy a 6500 call, It has gone 100 points below the point you bought and hence would be OTM (Out of The Money).

Ofcourse if we were talking about Puts the scenario would reverse, also in the case of writing options.

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Well as per my understanding for calls -
 

ITM = SPOT > greater than  STRIKE
ATM = SPOT = Equals STRIKE
OTM = SPOT < Lesser than STRIKE

For puts

ITM = SPOT < lesser than STRIKE
ATM = SPOT equals STRIKE
OTM = SPOT > greater than STRIKE
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When you are trading in options, it is important to understand the concept of a) In the Money b) At the Money and c) Out of the Money. This is applied for the stocks and Index option strike prices

  1. What is Strike price?

A) The Price at which the derivative can be exercised is called strike price. For the call option the strike price is where you can “BUY” the securities. For the put option where you can “SELL” the securities at that level.

Example: If you are agreeing with a person to buy (Call Option) in the future date a brand new Nike Shoes at Rs 6500 and now you are paying him a advance of Rs 120. Here the 6500 is called strike price. In the stock market buying is called “Call” and Selling is called “Put”. Here you have already fixed your buy price at 6500.

In the Future date

First Scenario

Due to huge demand the shoes price has gone up to Rs 6700 but you are still getting at Rs 6500 so your strike price is “In the Money”

In the Money: Spot > Strike Price: 6700 > 6500

Second Scenario

The price was same due to equal demand and supply Rs 6500 and you are also getting at 6500 so your strike price is “At the money”

At the Money : Spot = Strike Price: 6500= 6500

Third Scenario

Due to lesser demand the price has fallen at Rs 6300 but you have booked it at 6500 so your strike price is “Out of the money”

Out of the Money: Spot < Strike Price: 6300< 6500

Note: All Out of the Money Contract value will be Zero on Expiry day because buyer will not be interested to buy at higher price when the spot is lower.

In case of Put Options you are agreeing to sell some goods at fixed price. Here your view must be in sell prospective.

Example : You are planning to sell your brand new Mobile phone at Rs 6600, the buyer has agreed to buy at that rate in the future.

First Scenario

Due to huge demand the mobile price has gone up to Rs 6800 here you will not be interested to sell at 6600 so your strike price will be “Out of the Money”

. Out of the Money: Spot Price > Strike Price : 6800 > 6600

Second Scenario:

The price was same due to equal demand and supply Rs 6600 and you are also selling at 6600 so your strike price is “At the money”

At the money: Spot Price = Strike Price : 6600=6600

Third Scenario

Due to lesser demand the price has fallen at Rs 6400 but you are selling at 6600 so your strike price is “In the money”

In the Money: Spot price < Strike Price : 6400 < 6600

In put option if the spot price goes below the strike price you will be under profit because you are selling at higher price.

This concept is applicable to all stock options and index options.

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Beautifully explained…Nice. Thanks

Good one Vinay!