🧠 ITM vs ATM vs OTM Options Explained with Nifty Examples

📚 Option Series – Part  2 of 7 – Beginner

When you open an option chain, you'll see multiple strike prices around the current Nifty level.

Then come three terms that can confuse beginners:

ITM | ATM | OTM

What do they actually mean?

And why can two options on the same underlying behave differently simply because they have different strike prices?

Let's break it down.

📍 What Is “Moneyness”?

Moneyness describes the relationship between an option's strike price and the current price of its underlying.

Suppose:

Nifty = 25,000

You may see strikes such as:

24,900 | 24,950 | 25,000 | 25,050 | 25,100

Whether a strike is ITM, ATM or OTM depends on whether you're looking at a Call (CE) or Put (PE).

🟢 For Call Options (CE)

For a Call, lower strike prices are generally more favourable relative to the current underlying price.

If Nifty is at 25,000:

24,900 CE → ITM

25,000 CE → ATM

25,100 CE → OTM

So, for Calls:

👉 Strike below Nifty → ITM

👉 Strike near Nifty → ATM

👉 Strike above Nifty → OTM

🔴 For Put Options (PE)

For a Put, the relationship is reversed.

If Nifty is at 25,000:

25,100 PE → ITM

25,000 PE → ATM

24,900 PE → OTM

So, for Puts:

👉 Strike above Nifty → ITM

👉 Strike near Nifty → ATM

👉 Strike below Nifty → OTM

A simple way to remember it:

CALL → Lower strike = more ITM

PUT → Higher strike = more ITM

ATM is generally the strike closest to the current underlying price.

💰 Why Does Moneyness Matter?

ITM, ATM and OTM options don't have identical characteristics.

They can differ in:

📌 Intrinsic Value

📌 Time Value

📌 Delta Sensitivity

📌 Premium

📌 Liquidity

For example, an ITM option generally contains intrinsic value, while an OTM option has no intrinsic value.

An OTM option may also have a lower premium.

But that does not automatically mean it is cheaper in terms of risk.

A lower premium can come with a different payoff profile and may require a larger favourable move in the underlying before the position becomes profitable.

⚠️ Don't Choose a Strike Just Because It Looks Cheap

Suppose:

Nifty = 25,000

You compare:

25,000 CE

and

25,100 CE

The 25,100 CE may have a lower premium because it is OTM.

It can be tempting to think:

“Why pay more for the 25,000 CE?”

But the two options have different moneyness, intrinsic value and sensitivity to movements in Nifty.

So premium price alone is not enough to evaluate an option.

You also need to consider factors such as expiry, volatility, liquidity and the risk of the particular position.

🧠 The Simple Takeaway

Before looking at an option premium, first understand where its strike sits relative to the underlying.

ITM → Has intrinsic value

ATM → Strike is around the current underlying price

OTM → Has no intrinsic value

But remember:

ITM ≠ automatically better

ATM ≠ automatically better

OTM ≠ automatically cheaper risk

Moneyness is only one part of understanding an option.

💬 Your Turn

If Nifty is trading at 25,000, which Call is OTM?

A. 24,900 CE

B. 25,000 CE

C. 25,100 CE

👇 Vote first, then explain your answer in one line.

📚 Educational Note

Educational discussion only; not investment advice or a buy/sell recommendation.
This post explains the general concept of option moneyness and the differences between ITM, ATM and OTM options using illustrative Nifty examples. It does not recommend any particular strike, option, strategy or trade.

(HYPERLINK - Moneyness of Options: ITM, ATM, OTM Explained)

📚 Option Series – Part  1 of 7 - LINK