What Is In-The-Money (ITM), At-The-Money (ATM) And Out(of)-The-Money (OTM)?

You may have heard of these few terms being mentioned when people discussed options, so what exactly are In-The-Money (ITM), At-The-Money (ATM) and Out(of)-The-Money (OTM) referring to?

The concept is very simple. It basically means how the strike price (agreed price in an option contract) correlates to the market price of the stock and vice-versa. This relationship of strike price vs market price will determine if an option contract gets exercised or not.

ITM, ATM and OTM can mean different price outcomes in a PUT or CALL option contract but the general rule of thumb is that ITM generally favors the buyer while OTM favors the seller of the option contract. ITM means the option contract gets exercised while OTM means the option contract expires worthless.

In a PUT contract, the seller of the contract agrees to buy 100 units of shares from the buyer if the market price falls below the strike price on the expiration date. In turn, he receives a premium for selling this PUT contract.

Refresh your concept of how a PUT option works here:
How PUT Option Works

Let’s take Apple stock as an example. If the strike price agreed in the PUT contract is $150, and on the expiration date, these 3 scenarios could happen.

Scenario 1: In-The-Money (ITM)

This means the market price of Apple shares closes lower than the strike price.

E.g Apple stock closes at $140 or any price lower than $150. The seller of the PUT contract will have to buy 100 units of Apple shares from the buyer at $150 even if Apple stock crashes to $0.

Scenario 2: At-The-Money (ATM)

This means the market price of Apple shares closes at the same price as the strike price, which is $150.

Since the seller’s obligation is to buy the shares if it falls below the strike price, he/she is not obliged to buy the shares. So, the contract expires worthless.

Scenario 3: Out of-The-Money (OTM)

This means the market price of Apple shares closes higher than the strike price.

E.g Apple stock closes at $160 or any price higher than $150. The seller of the PUT contract will no longer need to buy 100 units of Apple shares from the buyer at $150 to fulfill the contractual obligation. The contract expires worthless.

In a CALL contract, the seller of the contract agrees to sell 100 units of his shares to the buyer if the market price closes above the strike price on the expiration date. In turn, he receives a premium for selling this Covered CALL contract.

Refresh your concept of how a CALL option works here:
How Call Option Works

Let’s take Apple stock as an example. If the strike price agreed in the CALL contract is $150, and on the expiration date, these 3 scenarios could happen.

Scenario 1: In-The-Money (ITM)

This means the market price of Apple shares closes higher than the strike price.

E.g Apple stock closes at $160 or any price lower than $150. The seller of the CALL contract will have to sell 100 units of Apple shares to the buyer at $150 even if the Apple stock price rises to $1000.

Scenario 2: At-The-Money (ATM)

This means the market price of Apple shares closes at the same price as the strike price, which is $150.

Since the seller’s obligation is to sell the shares if they rise above the strike price, he/she is not obliged to his/her shares. So, the contract expires worthless.

Scenario 3: Out of-The-Money (OTM)

This means the market price of Apple shares closes lower than the strike price.

E.g Apple stock closes at $140 or any price lower than $150. The seller of the CALL contract will no longer need to sell 100 units of Apple shares to the buyer at $150 to fulfill the contractual obligation. The contract expires worthless.

I hope this sharing has been useful to you. If you have any queries, please feel free to leave a comment or get in touch with me. I will leave links to the Wheel and LEAPS strategies for your info and reference.

Related Articles:
How Does The WHEEL Strategy Works?
How Does LEAPS Works And How I Use LEAPS To Maximise Gains?
[Option Strategy] LEAPS Vs. WHEEL

*** FREE MONEY ***

Sign up for WeBull Securities Brokerage and fund any amount to receive up to USD500 in share value (Apple, Tesla, Microsoft, Google)
Receive Free Money (USD30~USD500) When You Sign Up With WeBull Securities Platform (Fund ANY Amount)

*** FREE RESOURCES ***
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading

After accumulating more than 600k of unrealized losses on my portfolio, I wrote this article to encourage friends and investors who are also losing a lot of money to the market.
If You Are Feeling Depressed From Losing Lots Of Money In The Stock Market, Here’s An Article For You

In the 10 years of my investing journey, I have made many mistakes but also learned many lessons from these mistakes. I compiled the 10 most valuable lessons that I have learned and may they help you succeed in your investing journey.
Happy 10 Years Of Investing | 348k (Realised) Profit, 635k (Unrealized) Loss & 10 Lessons Learnt

The precious 6 lessons I learnt after cutting more than half a million of losses in the stock market through bad investments and risky trades.
6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading

How I managed to build a 1M investment/ trading portfolio despite coming from humble beginnings.
How A Poor Kid Got To A 1M Investment Portfolio | Tips & Principles Of Building Wealth

I did these 10 side hustles while holding a full-time job, so I share them here so you can be inspired to grow your wealth through a side hustle that you enjoy.
I Did These 10 Side Hustles While Working Full Time | 10 Side Hustle Ideas To Help You Earn An Extra Income

Struggling with inflation and high cost of living? Try these 10 methods to help you save money and accumulate more savings for investments or rainy days.
10 Ways To Save Money To Help You Fight Inflation & Rising Costs Of Living

Why I am building $120,000 of cash reserves in Singapore Savings Bonds (SSB) & 5 reasons why I think SSB is a worthy low or zero risk investment that you can consider.
Why I Am Building $120,000 Of Cash Reserves In Singapore Savings Bonds (SSB)? | 5 Reasons Why SSB Is A Worthy Low Risk Investment

Sharing why I am doing Dollar Cost Average (DCA) into SPY and QQQ ETF for long term investments and a step-by-step guide to doing it automatically with Interactive Brokers.
Why I Am Doing DCA (Automatically) For SPY & QQQ For My Long Term Investment? (20% ~ 30% Upside Potential) | Step By Step Guide To Activating Automatic Recurring Investment On IBKR

*** FREE MOTIVATIONAL BOOK ***

If earning more money from your investment does not excite you anymore, you may be seeking a purpose that brings fulfillment and meaning in life. I have written a motivational book that may be useful to you in some ways. You can also download a free copy here:
https://learninginvestmentwithjasoncai.com/finding-the-magical-realm-of-happiness-motivational-book