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.

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

  1. I thought ITM for selling puts means the market price of ABC shares closes higher than the strike price as per the image too?

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    1. Hi Clement, ITM PUT has the same meaning for the buyer and seller. ITM PUT means Share Price < Strike Price, means contract will get exercised and it favours the buyer. In the diagram, the center line is the share price, strike price is on the right, which means it must be higher than the share price. That also means the share price is lower than the strike price.

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