What do ITM, ATM & OTM Mean in Option Trading? | My Trade Logic

The buyer of options has the option, but not the responsibility, to buy and sell the underlying security at a specific strike price by specified expiration date. The transaction value or execution price for the shares of the underlying security is known as the strike price.

Investors need to pay an upfront price to purchase options, also known as premium. Many things determine the premium value. But My Trade Logic is here to make you understand these 3-terms in option trading- ITM, ATM, and OTM. So, are you all set? Then let us get started.

What is In the Money in Option trading?      

To begin with- it is an option that has intrinsic value. ITM, as a result, implies that options have values at a strike price lower than the current market price of the underlying asset. 

A call option allows the options folder to buy the security at a lower price than the current. 

A put option allows the options folder to sell the security at a much price than the current. 

What is At the Money in Option trading?

Next, we have At the Money (ATM), called a situation in which the strike price of an option is the same as the current market price of the underlying security. Having a delta value of +50, it is a call, and with a value of -50, it is a put.

Remember that both call and put options can be ATM at once. It has no intrinsic value, but it does have extrinsic worth before expiry, and you can also compare it to the ITM or the OTM.

What is Out of the Money in Option trading? 

Now, let's talk about Out of the Money, which refers to an option contract having extrinsic value only. The strike price of an OTM call option is greater than the market price of the underlying asset; when the delta is less than 50. Also, My Trade Logic says that a put option has a strike price lower than the market price. 

What is the difference between ITM and OTM? 

Furthermore, you can determine the difference between "In the Money" and "Out of the Money" by the strike price's placement relative to the underlying stock's market value, referred to as moneyness.

The current stock price already lowers the strike price of an ITM option. In contrast, an out-of-the-money option has a strike price higher than the current price of the underlying security, signaling that it has no intrinsic value.

Are options better to trade?

Finally, if you're wondering whether options are preferable for trading, let My Trade Logic tell you that OTM is less expensive than ITM. Also, OTM options require the underlying asset to move further for the option's value to increase on a large scale. OTM options have a strike price that is unfavorable in comparison to the underlying stock's price. In other words, OTM options have no profit built into them at the moment of purchase. 

The option may become profitable if the underlying stock price climbs sufficiently. Because the probability of the stock making such a big move before the option's expiration date is low, the premium to acquire the option is lower than those with more chance of profitability.

So keep in mind that what looks to be a great deal isn't necessarily the case. Because items are often inexpensive for a reason, if you have a fair decision with choosing an ATM option and delivering it at the right time, it may result in good returns, which is why it is so enticing.