Options contracts have three classifications based on the relationship between the market price of the underlying asset and the strike price: In-the-Money (ITM), At-the-Money (ATM), and Out-of-the-Money (OTM).
In-the-Money (ITM)
ITM status depends on whether it is a call or put option.
- A put option is ITM when the market price of the underlying asset is lower than the strike price, making it beneficial for the holder to sell the asset at a higher price.
- Conversely, a call option is ITM when the market price of the underlying asset is higher than the strike price, making it favourable for the holder to buy the asset at a lower price.
Being in-the-money implies the options contract holds intrinsic value, indicating that an immediate exercise would result in a profit, excluding the option premium.
At-the-Money (ATM)
ATM status occurs when the market price of the underlying asset aligns closely with the strike price. In this scenario, the option’s intrinsic value is minimal or non-existent.
Out-of-the-Money (OTM)
- For a put option, it is OTM when the market price of the underlying asset exceeds the strike price.
- For a call option, it is OTM when the market price of the underlying asset is lower than the strike price.
In these cases, the options contract holds no intrinsic value. Being out-of-the-money implies that an immediate exercise would result in a loss, excluding the option premium paid.
Understanding these classifications helps options traders make informed decisions based on the current relationship between the market price and the strike price of the underlying asset.