When trading options, selecting the appropriate strike price can be just as important as deciding whether to buy a call or put. Two options with the same expiry can behave very differently simply because their strike prices are different.
This is where ITM, ATM and OTM options come in. These terms describe an option’s relationship with the current price of its underlying asset. Understanding the difference can help traders choose contracts based on their market view, risk tolerance and trading objective.
What are ITM, ATM and OTM options?
Suppose an index is trading at 25,000.
For a call option:
- ITM (In the Money): A strike below 25,000, such as 24,800.
- ATM (At the Money): A strike closest to the current market price, such as 25,000.
- OTM (Out of the Money): A strike above 25,000, such as 25,200.
For a put option, the relationship is reversed. A strike above the current market price is ITM, a strike close to the market price is ATM, and a strike below the market price is OTM.
The key distinction is intrinsic value. ATM and OTM options have no intrinsic value at that point, but ITM options do have intrinsic value. But ATM and OTM options can still have time value as there is a chance they can become profitable before they expire.
If you want to learn option trading, understanding the difference between ITM, ATM and OTM options is a good place to start.
ITM vs ATM vs OTM: Key differences
The following table provides the key differences between ITM, ATM, and OTM.
| Factor | ITM | ATM | OTM |
| Intrinsic value | Yes | No | No |
| Premium | Generally higher | Moderate | Generally lower |
| Sensitivity to underlying | Generally higher | High | Lower |
| Time-value impact | Lower proportion of premium | Significant | Significant |
| Breakeven difficulty for buyer | Generally lower | Moderate | Higher |
Which option should you choose?
Let’s understand which one to choose.
ITM options
ITM options may suit traders who want greater exposure to movements in the underlying and are willing to pay a higher premium. Because the option already has intrinsic value, its price tends to have a relatively strong relationship with the underlying asset.
ATM options
ATM options are closest to the current underlying price. Hence, these are usually used when traders expect a meaningful move but want to avoid the higher premium associated with deeper ITM options.
They can be particularly sensitive to changes in the underlying near the strike. However, they can also lose value quickly as expiry approaches if the expected move does not happen.
OTM options
OTM options generally have lower premiums, which can make them appear attractive to traders with limited capital. But a lower premium does not automatically mean lower risk.
An OTM option needs the underlying to move sufficiently in the expected direction before expiry for the position to become profitable. If that move does not occur, the option can lose most or all of its premium.
Conclusion
ITM, ATM and OTM options offer different combinations of intrinsic value, premium cost and sensitivity to the underlying asset. ITM options generally provide more intrinsic value, ATM options are closest to the current price, while OTM options require a larger favourable move to become profitable.
There is no universally best strike. The appropriate choice depends on your expected price movement, timeframe, risk tolerance and the premium you are willing to pay. This basic understanding is particularly useful for option trading for beginners, as choosing a strike price can significantly change the risk and payoff of a trade.