Every option chain is arranged around three zones: in the money, at the money and out of the money. Traders shorten them to ITM, ATM and OTM, and they are among the first terms anyone learning options meets.
This article explains ITM, ATM and OTM for both call and put options, with examples, then shows why the zone an option sits in changes its price, its behaviour and the kind of bet it represents.
The three zones for call options
Suppose an index is at 24,000.
In the money (ITM): a call option whose strike is below the current price. A 23,800 strike call option is 200 points ITM. If it expired now, it would be worth 200 per unit — its intrinsic value.
At the money (ATM): a call option whose strike is at or very close to the current price. The 24,000 strike is ATM. It has little or no intrinsic value; its price is almost entirely time value.
Out of the money (OTM): a call option whose strike is above the current price. A 24,300 strike call option is 300 points OTM. It has no intrinsic value. For it to be worth anything at expiry, the index must rise above 24,300.
In practice, the strike closest to the current price is treated as ATM, and strikes on either side are described by how many points or steps away they are.
The three zones for put options
For put options, the direction reverses, because a put option gains when the price falls.
ITM put option: strike above the current price. With the index at 24,000, a 24,200 put option is 200 points ITM, with intrinsic value of 200.
ATM put option: strike at or near the current price — the 24,000 put option.
OTM put option: strike below the current price. A 23,700 put option is 300 points OTM and needs the index to fall below 23,700 to have value at expiry.
A handy rule: a strike that would let you buy below the market (for a call option) or sell above the market (for a put option) is in the money.
Notice that the same strike can be ITM for one type and OTM for the other. At 24,000, the 24,200 strike is an OTM call option and an ITM put option.
Some traders also speak of deep in or out of the money for strikes far from the current price, and of options that are near the money for strikes one or two steps away. These are informal descriptions rather than fixed definitions, but they are useful shorthand on a busy chain.
How price and behaviour differ
Using illustrative two-week premiums with the index at 24,000:
23,800 call option (ITM): around 290 — about 200 intrinsic value plus 90 time value.
24,000 call option (ATM): around 170 — all time value.
24,300 call option (OTM): around 60 — all time value.
Several differences follow.
Sensitivity to the index (delta). Deep ITM options move almost point for point with the underlying. ATM options move about half a point per point. Far OTM options move only a little at first.
Time value. It is largest at the money and shrinks in both directions. ATM options therefore lose the most to time decay in rupee terms as expiry approaches.
Chance of finishing with value. ITM options are more likely to end with value, OTM options less likely. That probability is a large part of why OTM options are cheap.
Percentage swings. Because OTM premiums are small, a modest move can double or halve them. That creates the attraction of cheap options and also their tendency to expire worthless.
The figures are illustrative, but the pattern holds across strikes and expiries.
What each zone is used for
ITM options behave more like the underlying itself, with less time value to lose. They suit traders who want directional exposure with less dependence on a large move, at the cost of a higher premium.
ATM options balance cost and sensitivity, and carry the most time value. They are central to many structures, such as straddles, and are where option sellers often collect the most premium.
OTM options are cheap and need a substantial move to pay off. Buyers use them for low-cost bets on large moves; sellers use them to collect premium on moves they think unlikely, accepting the risk of a sharp move.
Spreads combine zones: a bull call spread might buy an ATM call option and sell an OTM one, balancing cost against the size of move needed.
Choosing a zone is really choosing a trade-off between premium, probability and sensitivity.
Moneyness changes as the market moves
An option's zone is not fixed. If the index rises from 24,000 to 24,400, the 24,300 call option moves from OTM to ITM, and the 24,000 call option moves from ATM to ITM. Its behaviour changes with it: delta rises, and the option starts to track the index more closely.
This is one reason options positions need monitoring. A sold OTM option that becomes ITM changes from a small, decaying liability into one that moves point for point against the seller.
For stock options, moneyness at expiry also decides settlement: an ITM stock option held to expiry leads to physical delivery of shares.
Common mistakes: buying far OTM options because they are cheap, without asking how likely the needed move is; assuming an ITM option is safe, when its premium is larger and can still fall; and forgetting that moneyness at expiry, not today, decides the outcome.
An account with a full option chain
ITM, ATM and OTM strikes, premiums and Greeks, side by side. Free to open
Prices in the examples are illustrative, not market data. This is educational material, not advice, and no position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Derivatives can lose more than the amount blocked against them.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What does ITM, ATM and OTM mean in options?
In the money, at the money and out of the money. They describe where an option's strike sits relative to the current price, which determines whether it has intrinsic value.
Is a call option with a strike below the market price ITM?
Yes. A call option is in the money when its strike is below the current price, because it would allow buying below the market.
When is a put option out of the money?
When its strike is below the current price. It needs the underlying to fall below the strike to have value at expiry.
Why are OTM options cheap?
They have no intrinsic value and a lower chance of finishing with value at expiry, so their price is entirely time value and relatively small.
Which has the most time value: ITM, ATM or OTM?
ATM options carry the most time value, which shrinks as strikes move further in or out of the money.
Related Reading
- Where open interest clusters by strike
- A structure mixing OTM strikes
- Choosing a strike for a view
- Intrinsic and time value in depth
- What a call option gives its buyer
- What a put option gives its buyer
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
