ITM, OTM and ATM Options Explained

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Have you heard the term “in the money” or “out of the money” options and wondered what they meant? 

It can be confusing to a lot of new options traders. There’s a ton of terminology that you need to master. 

Let’s do a quick breakdown of what these two terms mean. 

What is the Strike Price?

To learn what in or out of the money means, you first need to know what the strike price is. 

The strike price is the price at which a buyer can buy the security, while for puts it is the price at which the security can be sold.

It has nothing to do with the current price. 

Rather,  imagine it as the goal or end destination price that you want the actual price of your underlying asset to reach. 

Calls Vs Puts

The second thing we need to know is whether you’re talking about calls or puts. 

For simplicity, when I say calls or puts, imagine the following. 

  • Calls = Betting The Price Goes Up
  • Puts = Betting the Price Goes Down

This distinction will help serve as another reference point. 

Next, let’s break down the vocabulary based on whether you’re talking about buying Calls or Puts. 

Call Options

For calls, the vocabulary breaks as follows.

  • In the Money (ITM) = Less Than Current Price
  • At the Money (ATM) = At The Current Price
  • Out of the Money (OTM) = Above Current Price

So, if the current price is $10 and we select a strike price of $12. That’s an out of the money (OTM) call option.

Easy right? 

Here’s a quick chart for our visual learners.

In or Out of the Money Options
In or Out of the Money Options

Put Options

For puts, the vocabulary breaks down in a similar way. 

But this time, we’re betting on the price going down. So our point of reference is the opposite direction. 

  • In the Money (ITM) = More Than Current Price
  • At the Money (ATM) = At The Current Price
  • Out of the Money (OTM) = Less Than Current Price

So, if the current price is $10 and we select a strike price of $12. That’s an in the money (ITM) put option.

For our visual learners, here’s another chart.

And that’s it! Once you get the hang of it, it’s pretty easy to reference where the strike price is in relation to the current price at any time.

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