Disclaimer: Options trading is considered extremely risky, 9 out of 10 traders incur a net loss, please trade responsibly. See the SEBI circular for more details
If you have just started with options, you would have heard these terms being used to refer to different strikes. These term define the money-ness of the options or in other words, how much money the buyer stands to make at expiry if the market expires at its current position.
The money or profits are always defined from buyers perspective. Options is a zero-sum game, so if buyer is loosing, seller is making that money.
What is ATM (At The Money) options?
At The Money (ATM) options are those options where the strike price is closest to the market price of underlying security.
If NIFTY is currently trading at 19000, then 19000 PE and 19000 CE would be considered ATM strikes. If NIFTY is trading at 18976 then still the closest strike is 19000, so 19000 is still ATM strike, however if NIFTY falls to 18974, the closest strike becomes 18950 and hence the 18950 strike would become ATM strike.
What is In ITM (The Money) options ?
In The Money (ITM) options are those options where the buyer would make money if the market were to be at the current position on expiry.
If NIFTY would be trading at 19000 on expiry, any one who bought a put of 18900PE, would stand to make Rs 100 per share, so 18900 PE would called In The Money (ITM) option. Similarly for Call, any one who bought 19100 CE, would also stand to make Rs 100 per share, so 19100 CE is also In The Money (ITM) option strike.
Put strikes lower than current market price are in the money while Call strikes higher than current market price are in the money.
What is Deep In The Money option?
A Deep In The Money option is a ITM option which is farther away from the current market price of underlying security.
Taking the same example of NIFTY at 19000, a Put option of 18500PE or Call option of 19500CE or farther would be consider a deep in the money option.
Words of the wise: Always be aware that deep in the money options have very low liquidity as the chances that seller would loose money is very high
What is OTM (Out of The Money) option?
An Out of The Money (OTM) option is an option strike where buyer of the option would loose the premium if market were to expire at current level.
Taking the same example of NIFTY at 19000, a Put option of 19100 PE or a Call option of 18900CE would be called an out of the money option as in each of these cases, the buyer would loose their premium if market expires at 19000.
What is Far Out of The Money options?
Just like deep in the money option, a far out of the money option is an option for a strike which is farther away from current price of underlying security.
A Put option of 19500PE or a Call option of 18500CE would be considered far out of the money option in case of NIFTY trading at 19000.
Words of the wise: exchanges put a restriction of how much OTM strike can be bought by single broker, so you may not be able to buy far out of money strikes if you are with popular broker
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