Table of Contents
- Intrinsic Value Explained
- ITM, ATM & OTM Classification
- Practical Example of Option Moneyness
- Key Takeaways
- FAQs
Intrinsic Value Explained
Intrinsic value represents the profit an option buyer gains by exercising the contract immediately. It’s calculated as follows:
- Call Option: Spot Price – Strike Price
- Put Option: Strike Price – Spot Price
Example:
If Nifty 50’s spot price is 11,415 and the strike price is 11,400 for a call option, the intrinsic value is:
11,415 – 11,400 = ₹15 (excluding premium).
👉 Master intrinsic value calculations
ITM, ATM & OTM Classification
1. In The Money (ITM)
- Call Option: Spot Price > Strike Price
- Put Option: Spot Price < Strike Price
- Features: Has intrinsic value; ideal for immediate exercise.
2. At The Money (ATM)
- Spot Price = Strike Price (for both calls/puts).
- Features: No intrinsic value; often used for strategic trades.
3. Out of The Money (OTM)
- Call Option: Spot Price < Strike Price
- Put Option: Spot Price > Strike Price
- Features: No intrinsic value; cheaper premiums.
Practical Example
Scenario: Nifty 50 trading at 11,400.
- ATM: 11,400 strike (reference point).
- ITM Calls: Strikes < 11,400 (grey background in options chain).
- OTM Calls: Strikes > 11,400 (white background).
- ITM Puts: Strikes > 11,400.
- OTM Puts: Strikes < 11,400.
Key Takeaways
- Moneyness categorizes options (ITM/ATM/OTM) based on strike vs. spot price.
- Intrinsic value determines profitability upon exercise.
- ITM = Profitable if exercised; OTM = No intrinsic value.
- Premiums reflect moneyness—OTM options cost less.
FAQs
Q1: Can an OTM option become ITM?
Yes, if the spot price moves favorably (e.g., spot rises above call strike).
Q2: Why trade ATM options?
They balance cost and potential, ideal for straddles/strangles.
Q3: Is intrinsic value ever negative?
No—it’s zero or positive.
Q4: How does moneyness affect premiums?
ITM options cost more due to intrinsic value; OTM are cheaper.
Q5: What’s the breakeven point for ITM calls?
Strike Price + Premium Paid.
Happy Trading!
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