In the money, At the money and Out of the money – Explained

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In- the- money options (ITM)

An in-the-money option is an option that would lead to positive cash flow to the holder if it were exercised immediately. A Call option is said to be in-the-money when the current price stands at a level higher than the strike price. If the Spot price is much higher than the strike price, a Call is said to be deep in-the-money option. In the case of a Put, the put is in-the-money if the Spot price is below the strike price.

At-the-money-option (ATM)

An at-the money option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is said to be “at-the-money” when the current price equals the strike price.

Out-of-the-money-option (OTM)

An out-of- the-money Option is an option that would lead to negative cash flow if it were exercised immediately. A Call option is out-of-the-money when the current price stands at a level which is less than the strike price. If the current price is much lower than the strike price the call is said to be deep out-of-the money. In case of a Put, the Put is said to be out-of-money if the current price is above the strike price.

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A.Sulthan, Ph.D.,
Author and Assistant Professor in Finance, Ardent fan of Arsenal FC. Always believe "The only good is knowledge and the only evil is ignorance - Socrates"
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