Choosing the Right Option Strike

Moneyness is a way of classifying an option based on its relationship with the current market price of the underlying asset.

There are three main categories:

• In the Money (ITM)
• At the Money (ATM)
• Out of the Money (OTM)

For a more detailed classification, options can also be described as:

• Deep ITM
• ITM
• ATM
• OTM
• Deep OTM

This classification helps traders understand how much value an option currently has and compare different Strike Prices.

Intrinsic Value: The Starting Point

Before understanding moneyness, it is important to understand Intrinsic Value.

Intrinsic Value is the amount an option would be worth if it were exercised immediately, ignoring the premium paid.

It can never be negative.

For a Call Option

Intrinsic Value = Spot Price − Strike Price

If the result is negative, the intrinsic value is considered zero.

Example

Spot Price = ₹1,020
Strike Price = ₹1,000

Intrinsic Value:

₹1,020 − ₹1,000 = ₹20

The Call Option has ₹20 of intrinsic value.

For a Put Option

Intrinsic Value = Strike Price − Spot Price

Again, if the result is negative, the intrinsic value is treated as zero.

Example

Strike Price = ₹1,000
Spot Price = ₹970

Intrinsic Value:

₹1,000 − ₹970 = ₹30

The Put Option has ₹30 of intrinsic value.

Why Can Intrinsic Value Never Be Negative?

Suppose a Call Option has a Strike Price of ₹1,000 while the market price is ₹980.

The calculation would be:

₹980 − ₹1,000 = -₹20

But exercising the Call would not force you to lose ₹20.

You simply would not exercise the option.

Therefore, the intrinsic value is ₹0, not -₹20.

This is an important feature of option payoffs: the value of an option cannot become negative merely because the option is not favourable to exercise.

Moneyness of a Call Option

For a Call Option, the Strike Price is compared with the current Spot Price.

In the Money (ITM)

A Call is ITM when its Strike Price is below the Spot Price.

Example:

Spot = ₹1,000
Call Strike = ₹950

The Call has intrinsic value and is therefore ITM.

At the Money (ATM)

A Call is ATM when its Strike Price is closest to the current Spot Price.

Example:

Spot = ₹1,000
Strike = ₹1,000

Out of the Money (OTM)

A Call is OTM when its Strike Price is above the Spot Price.

Example:

Spot = ₹1,000
Call Strike = ₹1,050

The option has no intrinsic value and is therefore OTM.

Moneyness of a Put Option

The logic is reversed for Put Options.

Put ITM

A Put is ITM when its Strike Price is above the Spot Price.

Example:

Spot = ₹1,000
Put Strike = ₹1,050

The Put has intrinsic value.

Put ATM

The Strike Price closest to the Spot Price is considered ATM.

Put OTM

A Put is OTM when its Strike Price is below the Spot Price.

Example:

Spot = ₹1,000
Put Strike = ₹950

The Put has no intrinsic value.