To understand ITM, OTM and ATM, first, we must understand the term "Moneyness."
Moneyness: in terms of finance or crypto, refers to the relative position of the current price (or future price) of an underlying asset (BTC, ETH, or stocks) in relation to the strike price of a derivative, usually a call option or put option.
This Moneyness definition relates to ITM, OTM, and ATM and describes the state of different options at a certain point in time.
- ITM (In the Money)(+): meaning the option's intrinsic value is positive if it expires today at the current asset price.
- OTM (Out of the Money)(-): meaning the option's intrinsic value is worthless if expiring at the current asset price.
- ATM (At the Money)(=): meaning the current underlying price and strike price are equal.
- Note: Intrinsic value (or Monetary Value) is the value of an option assuming it was exercised immediately.
Still, Confused?
Don't worry; we will provide some examples to help you understand.
First let look at the most simple to explain ATM (At the Money) which means the option strike price and the underlying asset price are equal. For instance if BTC is trading at 50k and the strike price of the option is the same at 50k this would be considered ATM. It does not matter if it is a call or put option for ATM it if strike price is equal to the value of the asset then it is ATM.
Call Option:
Next lets look at the Moneyness of an ITM (In the Money) Option. An ITM call option will have a spot price that is greater than the options' strike price. So if the BTC’s price is 52k and the strike is 50k (Someday we will get back to those prices 😂). That option is going to be ITM (In the Money).
Finally, on our call option if BTC is trading below 50k the option is considered OTM (Out of the Money) because the spot price is lower than the strike price.
Put Option:
However, on the flip side an ITM put option will have a spot price that is lower than the options strike price. For instance if the BTC price is $50K and the strike $52K then for a Put this would be ITM.
If our Put option if BTC is trading above 52k the option is considered OTM (Out of the Money) because the spot price is above than the strike price.
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