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The strike price of an option contract (call/put) in relation to the market price of the underlying stock is termed as moneyness. This moneyness in a contract can either be in-the-money (ITM), out-of-money (OTM) or at-the-money (ATM).
A call option (where the buyer hopes for increase in price) is said to be in the money if the current price of the underlying stock is higher than the strike price. For instance, when a trader buys a ₹100-strike call option and the market price of underlying is ₹120, then,the contract is considered to be in the money.
On the other hand, a call option contract is said to be OTM if the strike price is above the market price. On expiry, value of an OTM option will bcome zero and you as a trader end up losing the money (premium) paid.
Now, let’s consider the case of put option. It is considered to be in-the-money if the market price is lower than strike price of the option. A trader takes position in put option when he/she hopes that the price of the underlying will fall. So if the price of the underlying is ₹10 and the strike price is at ₹15 then the put option is in-the-money.
It is out-of-money when market price of the underlying is at say, ₹20. But the trader can profitably excercise the option on expiry only if the intrinsic value of the contract (market price minus strike price) is higher than the option premium paid.
An option contract is considered to be ATM when the market price and strike price are same or when strike price is close to market price of the underlying.
Send your queries to derivatives@thehindu.co.in
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