6.1 – Moneyness of a Call and Put Option
Moneyness of an option is a classification method which classifies each option strike based on how much money a trader is likely to make if he were to exercise his option contract today. There are three broad classifications –
- In the Money (ITM)
- At the Money (ATM)
- Out of the Money (OTM)
We will learn about them in detail in this video.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- The intrinsic value is equivalent to the value of money the option buyer makes provided if he were to exercise the contract.
- The intrinsic value cannot be negative; it is a non zero positive value.
- The intrinsic value of call option = Spot Price – Strike Price
- The intrinsic value of the put option = Strike Price – Spot Price.
- Any option with an intrinsic value is classified as an ‘In the Money’ (ITM) option.
- Any option that does not have an intrinsic value is classified as an ‘Out of the Money (OTM) option.
- If the strike price is almost equal to the spot price, the option is considered the ‘At the money (ATM) option.
- All strikes lower than ATM are ITM options (for call options)
- All strikes higher than ATM are OTM options (for call options)
- All strikes higher than ATM are ITM options (for Put options)
- All strikes lower than ATM are OTM options (for Put options)
- When the intrinsic value is very high, it is called the ‘Deep ITM’ option.
- Likewise, it is called the ‘Deep OTM’ option when the intrinsic value is the least.
- The premiums for ITM options are always higher than the premiums for OTM options.
- The Option chain is a quick visualisation to understand which option strike is ITM, OTM, ATM (for both calls and puts), and other information relevant to options.