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ITM vs ATM vs OTM Share Market Options Trading

Learn the different concepts of Share Market Options Trading (ITM vs OTM vs ATM)

Share Market trading is always a risky bet and investors, traders have to analyze their risk appetite while trading in Equity, derivatives, etc. In this edition, we are going to discuss ITM (In the money call option), ATM (At The Money call option), and OTM (Out of the money call option).

Let us understand the concept of Call Options with an example. The call options is a case where the investor is bullish about the Share Market trend i.e., they are expecting Share Market to rise and rise as against the Put Options where the investor is bearish towards the Share Market trend i.e., they are expecting a downward movement.

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Suppose Nifty is trading at 15800 as of the date July 2021, any call option at 15800 will be treated as ATM (At The Money call option), and any call option above 15800 let us say 15900 or 16000 will be treated as OTM (Out of the money call option), and a call option below the 15800 let us say 15600 or 15500 will be treated as ITM (In the money call option).

ATM (At The Money call option) – Medium Risk and Medium Reward as the probability of reaching the target is medium.

In ATM (At The Money call option), the Investor has to pay a moderate premium as compared to the OTM and ITM whereas the probability of achieving the desired target is fairly good.

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Let’s say Nifty option 15800 is trading at Rs.350/- (amount to be invested at the time of buying a call option at 15800 would be 350*75=Rs.26,250/-)

That means the Share market has to go higher by 350 points in order to fetch you with the profit i.e., 15800+350 = 16150. If the Share market goes above 16150 then only you will start getting your profitable amount.

OTM (Out of the money call option) – Low Risk and Low Reward due to long prediction/ low probability

In OTM (Out of the money call option), the Investor has to pay a very little premium as compared to the ATM and ITM whereas the probability of achieving the desired target is low due to the far target set out at the option call.

Let’s say you want to buy a Nifty option for 16300 which is trading at Rs.80/- (amount to be invested at the time of buying such call option would be 80*75=Rs.6000/-)

That means the Share market has to go higher by 75 points in order to fetch you with the profit i.e., 16300+80 =16380. If the Share market goes above 16375 then only you will start getting your profitable amount.

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ITM (In the money call option) – High Risk and High Reward due to high probability of reaching the target.

In the ITM option, the Investor has to pay more premium as compared to OTM and ATM but the probability of achieving the desired target is also high.

Let’s say you want to buy a Nifty option for 15300 which is trading at Rs.600/- (amount to be invested at the time of buying such call option would be 600*75=Rs.45000/-)

That means the Share market has to go higher by 75 points in order to fetch you with the profit i.e., 15300+600 =15900. If the Share market goes above 15900 then only you will start getting your profitable amount.

OptionNifty at 15800Lot SizeRateInvested AmountNifty closes at 16200If Nifty closes at 15800If Market Closes at 15300
ITM (In the money call option)153007560045,000900-600 = +300 profit500-600 = (-100 loss)Loss (-600)
ATM (At The Money call option)158007535026,250400-350 = +50 profitLoss (-350)Loss (-350)
OTM (Out of the money call option)1630075806,000Profit +0 (zero)Loss (-80)Loss (-80)

Note:

  1. Option traders do not have to wait till the end of the option period, they can sell off their position as per the scenario.

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