An option chain displays a list of available put and call options in terms of strike price and expiration date. One of the basic ways to understand these contracts is to classify their strike prices as In-the-Money (ITM), At-the-Money (ATM) or Out-of-the-Money (OTM). These terms describe the relationship between an option’s strike price and the current price of the underlying asset. Understanding these classifications is important for reading an option chain and identifying where different option contracts stand relative to the underlying asset’s price.
What Is a Strike Price?
The strike price is the price that the option contract would give the option holder the right to buy or sell the underlying asset depending on whether the option is a call or put. The strike price is the price determined at the time of the option contract and remains constant throughout the life of the contract.
It is also important to understand that a Demat account and an options trading facility serve different purposes for investors looking to open free demat account. Eligible securities are kept electronically in a Demat account and orders to buy and sell securities are placed in a trading account. Options are derivatives, and investors should educate themselves on the terms and risks of their options contracts prior to trading them.
What Does In-the-Money Mean?
Intrinsic value of an ITM option depends on the market price of the underlying asset.
A call option is ITM when the underlying price is trading below the call’s strike price. In the example above, if the underlying price is trading at ₹1,000, and the strike price is ₹950, then the call is an ITM because the strike price is lower than the underlying price.
In the case of the Put option, the situation is reversed. If the strike price is higher than the current price of the stock, the put is considered to be in the money. For example, if the underlying asset is trading at ₹1,000 and the put option has a strike price of ₹1,050, the put option is ITM.
What Does At-the-Money Mean?
The strike price of an ATM option is fairly close to the market price of the underlying asset. For instance, if the stock is being quoted at the rate of ₹1,000, the strike price would be considered as ATM.
The actual time of the strike could be influenced by the strike interval that is available in the option contract. The price of the option stays constantly in flux; therefore, it can move from ATM to ITM or OTM at another time.
What Does Out-of-the-Money Mean?
An OTM option does not hold any value in terms of the underlying price.
With a call option, the strike is OTM if it is above the current market price of the underlying assest. A call option with a strike price of ₹1,050 will be OTM when the underlying price is trading at ₹1,000.
The strike is OTM in a put option when it is trading for less than the underlying price. If the underlying is trading at ₹1,000, then such a put with a ₹950 strike price would thus be OTM.
How ITM, ATM and OTM Differ
The main difference between these categories is the relationship between the strike price and the underlying price.
| Option type | Call option | Put option |
| ITM | Strike below underlying price | Strike above underlying price |
| ATM | Strike close to underlying price | Strike close to underlying price |
| OTM | Strike above underlying price | Strike below underlying price |
The classification is not permanent. Suppose a stock is trading at ₹1,000 and an investor holds a ₹950 call. If the stock rises further, the call remains ITM. However, if the stock falls below ₹950, the same call can become OTM.
This is why an option chain needs to be viewed along with the current underlying price and the contract’s expiry date.
How to Read These Strikes in an Option Chain
An option chain generally displays multiple strike prices along with information such as call and put premiums, open interest, volume and implied volatility. Investors can use the underlying price as a reference point and then identify which strikes are ITM, ATM and OTM.
The dixon option chain, for instance, can be viewed by comparing the available strike prices with the prevailing price of the underlying. This can help explain why different contracts have different premiums and levels of market activity. However, the option chain itself does not guarantee a particular price movement.
Conclusion
ITM, ATM and OTM are basic classifications used to understand where an option’s strike price stands relative to the underlying asset. Calls and puts follow different relationships, while the classification can change as the underlying price moves. Reading these categories alongside premium, open interest, volume, volatility, and expiry can provide a clearer view of an option chain. Investors comparing platforms can also examine the trading and account facilities offered by 5paisa before choosing how they want to access the derivatives market.
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