Call & Put Options: ITM, ATM, OTM Concepts

An option premium consists of components, namely intrinsic value and the Time value.

Option premium = Intrinsic value + Time value

Intrinsic value: The Intrinsic value is the amount by which the strike price of an option is In-the-money. The Intrinsic value for call option will be the underlying stock’s price minus its call strike price, whereas for the put option, it is the put strike price minus the underlying stock price. ATM and OTM options don’t have any intrinsic value.

Time Value: The Time value is also referred to as the extrinsic value. It is the excess amount over and above an option’s intrinsic value. Time value decreases to zero over time as the option moves closer to expiration. This circumstance is called as Time decay. Options premium depends on time to expiration. Options that would expire after a longer duration of time would be more expensive as compared to those expiring in the current month as the former would have more time value left, increasing the probability of trade going in your favour.

In the money call option

An In-the-money call option is described as a call option whose strike price is less than the spot price of the underlying assets.

In the following example of Nifty, the In-the-money call option would be any strike price below Rs.8300 (spot price) of the stock (i.e. Strike price< Spot price).So, NIFTY FEB 8200 CALL would be the example of In-the-money call. An In-the-money option always has some intrinsic value and Time value.

At the money call option

An At-the-money call option is described as a call option whose strike price is approximately equal to spot price of the underlying assets (i.e. Strike price=Spot price). Hence, NIFTY FEB 8300 CALL would be an example of At-the-money call option, where the spot price is Rs 8300. An At-the-money call option doesn’t have any intrinsic value and it consists of only time value.

Out the Money call option

An Out-the-money call option is described as a call option whose strike price is higher than the spot price of the underlying assets (i.e. Strike price> Spot price).Thus, an Out-the-money call option’s entire premium consists of Time value/Extrinsic value and it doesn’t have any Intrinsic value. So, NIFTY FEB 8400 CALL would be an example of Out-the-money call option, where the spot price is Rs 8300.