Module 5   Introduction to Options Trading (Video Series)Chapter 6

Moneyness of option

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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 –

  1. In the Money (ITM)
  2. At the Money (ATM)
  3. 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

  1. The intrinsic value is equivalent to the value of money the option buyer makes provided if he were to exercise the contract.
  2. The intrinsic value cannot be negative; it is a non zero positive value.
  3. The intrinsic value of call option = Spot Price – Strike Price
  4. The intrinsic value of the put option = Strike Price – Spot Price.
  5. Any option with an intrinsic value is classified as an ‘In the Money’ (ITM) option.
  6. Any option that does not have an intrinsic value is classified as an ‘Out of the Money (OTM) option.
  7. If the strike price is almost equal to the spot price, the option is considered the ‘At the money (ATM) option.
  8. All strikes lower than ATM are ITM options (for call options)
  9. All strikes higher than ATM are OTM options (for call options)
  10. All strikes higher than ATM are ITM options (for Put options)
  11. All strikes lower than ATM are OTM options (for Put options)
  12. When the intrinsic value is very high, it is called the ‘Deep ITM’ option.
  13. Likewise, it is called the ‘Deep OTM’ option when the intrinsic value is the least.
  14. The premiums for ITM options are always higher than the premiums for OTM options.
  15. 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.

6 comments

  1. Varghese Mani says:

    excellent presentation. how to go to the next module.

  2. Poornesh says:

    Sir, can we expect some videos on Option Strategies as well in the upcoming sessions?

  3. Deepika Deepak Chavan says:

    very informative videos, thank you versity. Requesting to share more video’s on option trading (like practical execution’s, how to select strike price, intraday trading in options)

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