Lesson 05
Moneyness: ITM, ATM, OTM and Option Premium
Read the strike, split the premium, and understand why moneyness is different from profit.
One level. Three labels.
| 24,800strike | 25,000strike | 25,200strike | |
|---|---|---|---|
| Call | |||
| Put |
Hypothetical NIFTY spot 25,000 · intrinsic value per unit · illustrative quotes, not market data
Is the option valuable—or is your trade profitable?
I’m Mr. Chartist. Those are two different questions. We will read one NIFTY option, compare its strike with the index, and keep the value of the contract apart from the money you paid for it.
By the end you will be able to answer
- How do you tell ITM, ATM and OTM apart?
- What are you paying for in the premium?
- Can the same option change its label?
NIFTY is at 25,000 and you open its option chain. The calls at 24,800, 25,000 and 25,200 all show different prices. Before you call one of them cheap, ask a simpler question: what does its strike let the buyer do at today’s index level?
The answer is called moneyness. It sorts every option into one of three groups: in the money (ITM), at the money (ATM) or out of the money (OTM). The label is the same whether you bought the option or sold it. It does not tell you your profit, your chances or whether the trade suits you. Every price here is a teaching example, not a market quote.
Updated · Indian exchange mechanics; hypothetical prices
How do you tell ITM, ATM and OTM apart?
Compare the spot with the strike
NIFTY is at 25,000 and the 24,800 call, the 25,000 call and the 25,200 call all have different prices. Which one is cheap?
Ask a simpler question first: what does the strike let the buyer do at today’s level? That is called moneyness.
So I compare two numbers?
The spot, the index level right now, and the strike, fixed in the contract. A call is ITM when the spot is above the strike. A put reverses it.
And if they are exactly equal?
Then it is ATM, and its intrinsic value is zero. Intrinsic value is never negative, because a buyer can simply walk away.
ITM and OTM are labels, not profit and loss. They say nothing about your chances or whether a trade suits you.
Compare two numbers: the spot and the strike. The spot is the index level right now. The strike is a fixed level written into the contract; when the spot moves, the strike stays where it is. Here the underlying, the thing the option depends on, is NIFTY 50.
A call gives the buyer the right to buy at the strike. If the spot is above the strike, that right is worth something, so the call is ITM. If the spot is below the strike, the call is OTM. A put gives the right to sell at the strike, so everything reverses: a put is ITM when the spot is below the strike and OTM when it is above.
The worth of that right has a name: intrinsic value, counted per unit. For a call it is spot minus strike. For a put it is strike minus spot. If the answer is negative, write zero: a buyer can simply walk away, so the right is never worth less than nothing. When spot and strike are exactly equal, the option is ATM and its intrinsic value is zero. This is a way of measuring value; it does not let you exercise an Indian exchange option before expiry.
One NIFTY level. Two opposite rights.
Current spot: 25,000 points. Compare calls and puts at the same three strikes; amounts show intrinsic value per unit.
Lower strikes favour call intrinsic value; higher strikes favour put intrinsic value.
Hypothetical NIFTY examples, not live quotes. Trade results are before brokerage, charges and taxes. A 65-unit lot is assumed for teaching; check the selected contract.
Read the ladder across each row. With NIFTY at 25,000, the 24,800 call has 200 points of intrinsic value and the put at that strike has none. At 25,200 it is the other way round: the put has 200 points and the call has none. Blue marks a Call and beige marks a Put. ITM and OTM are neutral words, not profit and loss.
On a live chain, “ATM” usually means the nearest strike. With spot at 25,020 and strikes at 25,000 and 25,050, the 25,000 strike is nearest. Its call is 20 points ITM and its put is 20 points OTM, so “near ATM” does not mean zero intrinsic value. Always compare the actual spot and strike.
What are you paying for in the premium?
Split the price into its two parts
The premium is the price of the option itself, quoted per unit. Multiply it by the quantity to get the premium for the position. A premium of ₹320 does not mean NIFTY is at 320. The index level, the strike and the premium are three different numbers.
Take the 24,800 call with NIFTY at 25,000. Its intrinsic value is 200. Say it trades at ₹320 per unit. The other ₹120 is extrinsic value: the premium minus the intrinsic value. People often call it time value, but time is only one ingredient. Expected movement (implied volatility), interest rates and expected dividends also feed into it.
For contrast, take a separate 25,200 put at the same spot, also at ₹320. Its intrinsic value is also 200, so its extrinsic value is also ₹120. We chose matching prices to make the split easy to see. Real quotes for these two contracts would not match.
₹320 premium = ₹200 intrinsic + ₹120 extrinsic
Separate illustrative quotes, same NIFTY spot of 25,000. Both bars use the same rupee-per-unit scale.
Same split, opposite rights. Premium is not the index level.
Hypothetical NIFTY examples, not live quotes. Trade results are before brokerage, charges and taxes. A 65-unit lot is assumed for teaching; check the selected contract.
An OTM or exactly ATM option has zero intrinsic value, so every rupee of its premium is extrinsic. It can still be bought and sold before expiry. Zero intrinsic value is not the same as a zero price.
At expiry no time is left, so the option is worth its intrinsic value and nothing more. Before expiry, you work out the extrinsic part from a quote and a spot taken at the same moment. A last traded price and a newer spot may describe different moments, so check the timestamps and the bid and ask first.
The extrinsic part is not always positive for a European option. A deep ITM European put can trade below its intrinsic value, because the strike is received only at expiry and money has a cost. That alone is not a bad quote or a free profit, since you cannot exercise it today. The pricing lessons explain this limit. Our ₹320 examples are positive by construction.
Other inputs unchanged, the passing of time usually shrinks the extrinsic part. The quoted premium need not fall every day: a move in the index or a rise in implied volatility can outweigh it. The next lesson looks at these inputs.
Can the same option change its label?
Labels move as the index moves
Yes. The strike never moves, but the spot does. Keep both strikes at 25,000 and pick a NIFTY spot in the figure. Spot above 25,000 makes the call ITM and the put OTM. Spot below 25,000 does the opposite. Neither contract gets a new strike or expiry; only the label changes.
This is why “” and “” describe a position, not a moneyness label. A bought call is generally and a bought put generally , other inputs unchanged. Either one can be ITM or OTM, depending on where the index is.
Move NIFTY, keep both strikes at 25,000
Choose a spot to see the contract classification and intrinsic value. No premium or profit forecast is being calculated.
Selected spot 25,000 · fixed strike 25,000
CALL · CE
ATMIntrinsic ₹0 per unit
PUT · PE
ATMIntrinsic ₹0 per unit
Hypothetical NIFTY examples, not live quotes. Trade results are before brokerage, charges and taxes. A 65-unit lot is assumed for teaching; check the selected contract.
The figure shows intrinsic value only. It does not invent a premium for the new spot. To price the option before expiry you also need the time left, implied volatility and live quotes.
Selling flips the exposure. A short call is generally or neutral, and a short put is generally or neutral. So selling an option is not always a view, and other holdings in the portfolio can change the net exposure again.
Is an ITM option always a winning trade?
Why the label is not profit or loss
No. You buy a NIFTY 25,000 call at ₹100 per unit, with an assumed 65 units. You pay ₹6,500. At expiry the official settlement level is 25,050. The call is ITM by 50 points, so it settles for 50 × 65 = ₹3,250 in cash. You paid ₹6,500 and received ₹3,250: a ₹3,250 loss before costs.
Two different questions are at work. Moneyness asks whether the right has intrinsic value. Profit asks whether that value is more than the premium you paid. For a bought call held to expiry, the break-even before costs is strike plus premium: 25,100. Between 25,000 and 25,100 the call is ITM and still loses money.
ITM by 50 points. Still a ₹3,250 loss.
Bought NIFTY call · strike 25,000 · entry premium ₹100 per unit · 65 assumed units · held to expiry at 25,050.
Expiry break-even before costs: 25,100 points. Above the strike is not necessarily above break-even.
Hypothetical NIFTY examples, not live quotes. Trade results are before brokerage, charges and taxes. A 65-unit lot is assumed for teaching; check the selected contract.
A put mirrors this. A separate bought 25,000 put at ₹100 per unit breaks even at 24,900 before costs. If NIFTY settles at 24,950, the put is ITM by 50 points and still loses ₹50 per unit. Real costs move the break-even a little further.
These are expiry results, using the official settlement level for an index contract. Before expiry you can close the position by trading the opposite side of the same contract, and its price may differ from intrinsic value, so an early exit uses the price you actually got. NIFTY settles in cash; no shares reach your demat account.
Can an OTM option make money?
What it takes for a cheap strike to pay
Yes, if you sell it before expiry. Take a separate bought NIFTY 25,200 call. You buy at ₹60 per unit. Later, with NIFTY at 25,100, you sell the same contract at ₹90. The call is still OTM, since 25,100 is below 25,200. But you sold for ₹30 more than you paid: ₹30 × 65 = ₹1,950 before costs.
Both prices are hypothetical. A rise in the index, or in implied volatility, can lift an OTM premium before expiry. The lesson is that “OTM” alone does not decide the result of an early exit. It is not a promise that any index move will take the premium to ₹90.
Still OTM. A higher executed premium changes the result.
Separate bought NIFTY call · strike 25,200 · spot at sale 25,100 · same contract and expiry · 65 assumed units.
₹3,900 paid
₹5,850 received
(₹90 − ₹60) × 65 units
Hypothetical NIFTY examples, not live quotes. Trade results are before brokerage, charges and taxes. A 65-unit lot is assumed for teaching; check the selected contract.
Now suppose you simply hold the call, and NIFTY settles at 25,100. Intrinsic value is zero, so you lose the whole ₹60 per unit plus costs. The early sale and the worthless expiry are two different routes for the same call. Only one of them can happen to a position.
A bought call can lose even while the index rises, if its premium falls overall. A bought put can lose in a falling market too. Direction, the size and timing of the move, volatility and your entry price all count. And the last traded price is not a promise of what you will get when you sell.
Where does moneyness stop being enough?
The checks the label cannot replace
When you compare strikes, hold the underlying, the option type, the expiry and the quantity the same. An ITM option holds more intrinsic value, so it usually costs more than a comparable OTM one. A lower price cuts the buyer’s outlay. It does not make the option a bargain or more likely to pay off.
How much an option’s price moves for a small move in the index is called delta. A deep ITM call has a delta near +1 and a deep ITM put near −1, other inputs unchanged. Being ITM alone does not make an option move one-for-one, and delta itself keeps changing.
For a seller, starting OTM gives some distance from the strike, not a guaranteed profit. Take a written NIFTY 24,800 put with spot at 25,000, premium ₹100 per unit. It starts OTM. The writer is generally or neutral, and the beige Put label names the contract, not a view.
Say NIFTY settles at 24,750. The put is ITM by 50 points, so the writer pays ₹50 per unit but collected ₹100: still a ₹50 profit per unit before costs. The expiry break-even is 24,700. At 24,600 the writer pays ₹200 against ₹100 collected and loses ₹100 per unit. Crossing the strike starts intrinsic value; it does not by itself start a net loss.
For a written put, the strike and break-even differ
Written NIFTY put · strike 24,800 · ₹100 premium received per unit · 65 assumed units · expiry results before costs.
The written put is generally or neutral. An ITM settlement can still leave the writer profitable after including the entry premium.
Hypothetical NIFTY examples, not live quotes. Trade results are before brokerage, charges and taxes. A 65-unit lot is assumed for teaching; check the selected contract.
Before any trade, read the whole ticket: underlying, Call or Put, strike, expiry, lot size and quantity. Look at the live bid and ask and the spread, not only the last price. A buyer checks the premium outlay. A writer checks margin and funding. Everyone checks the settlement rule. Moneyness replaces none of these.
A stock option can end in physical delivery, which needs funds or shares at expiry, even if a bought option’s loss is capped at its premium. This lesson sticks to NIFTY index options, which settle in cash. The next lesson picks up the question moneyness leaves open: intrinsic value is easy to calculate, but the price before expiry needs more inputs.
Before you go
Check yourself
4 questions from this lesson. Pick an answer to see why, then slide on to the next.
Question 1 of 4
Questions readers ask
Common questions
What do ITM, ATM and OTM mean for calls and puts?
A call is ITM when the underlying is above strike and OTM when below it. A put is ITM when the underlying is below strike and OTM when above it. Exact ATM means equal spot and strike; option chains often use ATM for the nearest available strike. These labels do not include your entry premium.
Does an in-the-money option mean I am making a profit?
No. A bought 25,000 call costing ₹100 per unit has intrinsic value of ₹50 at expiry at 25,050. It is ITM, but its buyer loses ₹50 per unit before costs. Its expiry break-even is 25,100 before costs.
How do I split premium into intrinsic and extrinsic value?
Call intrinsic value is the greater of spot minus strike or zero. Put intrinsic value is the greater of strike minus spot or zero. Subtract intrinsic value from the option premium to obtain the observed extrinsic residual. Use matching timestamps and check quote quality. Premium of ₹320 with intrinsic value of ₹200 gives an illustrative residual of ₹120 per unit. A European ITM put can have a negative residual because of carry and deferred exercise; a negative residual alone does not establish arbitrage.
Does the nearest ATM strike always have zero intrinsic value?
No. At spot 25,020, a nearest available strike of 25,000 has a call 20 points ITM and a put 20 points OTM. Both have zero intrinsic value only when spot equals strike exactly. Near ATM is a practical shorthand.
Can an out-of-the-money option make a profit?
A buyer can profit by executing a sale before expiry at a higher premium than the entry price, after accounting for costs. The option can remain OTM throughout. An OTM option held to expiry instead has zero intrinsic value; a buyer then loses the premium paid, plus costs.
Does time value decrease every day?
Time passing typically reduces time value with other inputs unchanged. An observed market premium need not fall every day: underlying movement or changing implied volatility can outweigh that effect. At theoretical expiry there is no remaining time value.
Is writing an OTM put guaranteed income?
No. The underlying can fall through the strike and beyond the writer’s expiry break-even. For a standalone written put, break-even before costs is strike minus premium received. Margin is security for obligations, rather than a loss limit, and additional funding may be needed.
Is an ITM option safer than an OTM option?
The label alone cannot answer that. Compare the actual position, expiry, premium, quantity, liquidity, volatility and settlement obligations. A bought ITM option can lose its entry premium, and an OTM option can expire worthless. A low price is not evidence of value or suitability.