Definitions
| Term | Call | Put | Price is made of |
|---|---|---|---|
| In the money (ITM) | Strike below the index | Strike above the index | Intrinsic value plus time value |
| At the money (ATM) | Strike closest to the index | Strike closest to the index | Almost all time value |
| Out of the money (OTM) | Strike above the index | Strike below the index | Time value only |
Deep ITM means far inside the money, where the option moves almost one for one with the index. Far OTM means far outside it, where the option is cheap and rarely pays.
A worked example on Nifty
Nifty is at 25,000 with 12 days to expiry and implied volatility of 14%. The same strikes are ITM for one side and OTM for the other.
| Strike | Call | Call price | Call delta | Put | Put price | Put delta |
|---|---|---|---|---|---|---|
| 24,500 | ITM by 500 | ₹617.65 | 0.81 | OTM by 500 | ₹65.35 | −0.19 |
| 24,800 | ITM by 200 | ₹398.30 | 0.66 | OTM by 200 | ₹145.35 | −0.34 |
| 25,000 | ATM | ₹280.50 | 0.54 | ATM | ₹227.10 | −0.46 |
| 25,200 | OTM by 200 | ₹187.50 | 0.41 | ITM by 200 | ₹333.70 | −0.59 |
| 25,500 | OTM by 500 | ₹92.10 | 0.25 | ITM by 500 | ₹537.65 | −0.75 |
The 24,800 call is ITM by 200 points, so ₹200 of its ₹398.30 price is intrinsic value and ₹198.30 is time value. The 25,200 call is OTM, so all of its ₹187.50 is time value. On one lot of 65, the ITM call costs ₹25,889.50 and the OTM call ₹12,187.50.
Finding the ATM strike
The ATM strike is the one closest to the current price, 25,000 when Nifty is at 25,000 and strikes are 50 points apart. If Nifty is at 25,030, the 25,050 strike is ATM. Many traders use the futures price rather than the spot when the two differ by more than a strike gap, because option prices follow the forward price of the index. Bank Nifty strikes are 100 points apart, so its ATM strike is a wider band.
How moneyness changes as Nifty moves
Moneyness is not fixed. If Nifty rises from 25,000 to 25,200, the 25,200 call goes from OTM to ATM, the 25,000 call from ATM to ITM by 200, and the 25,200 put from ITM to ATM. An option bought OTM can finish ITM, which is what a buyer hopes for, and an option sold OTM can be pushed ITM, which is what a seller fears.
Time value by moneyness
Time value is largest at the money and falls on both sides, and all of it disappears by expiry.
The 24,800 call, ITM by 200 points, with Nifty unchanged at 25,000:
| Days to expiry | Price | Intrinsic value | Time value |
|---|---|---|---|
| 12 | ₹398.30 | ₹200 | ₹198.30 |
| 5 | ₹297.25 | ₹200 | ₹97.25 |
| 1 | ₹216.45 | ₹200 | ₹16.45 |
| At expiry | ₹200.00 | ₹200 | ₹0 |
An OTM option follows the same path but has no intrinsic value to fall back on: if it is still OTM at expiry, it is worth nothing. That is why OTM options lose value fastest in the last days.
How moneyness affects a trade
| ITM | ATM | OTM | |
|---|---|---|---|
| Cost | Highest | Medium | Lowest |
| Delta | 0.6 to 1 | About 0.5 | 0 to 0.4 |
| Chance of expiring with value | Highest | About even | Lowest |
| Time decay in rupees | Lower | Highest | Lower, but a larger share of the price |
| Typical use | Trading direction with less decay | Straddles, strangles, directional trades | Cheap lottery-style buys; the strikes most sellers write |
Buyers who want the option to track the index choose ITM or ATM strikes. Buyers of OTM options pay less but need a larger move. Sellers usually write OTM options, collecting a smaller premium for a higher chance that the option expires worthless. The strike price selection guide works through the choice for Nifty and Bank Nifty.
At expiry
At expiry an option is worth exactly its intrinsic value. ITM index options are settled in cash at the index's closing value; OTM options expire worthless. ITM stock options are settled by delivery of shares, which is why traders close ITM stock options before the expiry week. Since 1 April 2026, an index option that is exercised at expiry pays STT at 0.15% of its intrinsic value, the same rate as a sale.
When moneyness matters most
- Choosing a strike, where it sets the cost, the delta and the odds.
- Expiry week, when OTM options collapse and ITM options converge to intrinsic value.
- Stock options, where ITM at expiry means delivery.
- Reading an option chain, where ITM strikes are usually shaded and the ATM row sits in the middle.
Related terms
- Intrinsic value meaning: the part of the price an ITM option would be worth if exercised now
- Strike price meaning: the price at which an option can be exercised
- Delta meaning: how much an option moves per point, which rises with moneyness
- Premium meaning: the price of an option
Learn more
- Strike price selection: how to choose between ITM, ATM and OTM strikes
- Option chain: reading moneyness on the chain
- Options trading: calls, puts and contracts explained
Frequently asked questions
Which is better to buy, ITM or OTM options?
ITM options cost more and track the index more closely; OTM options cost less and need a larger move before they pay. Most direction trades use ATM or slightly ITM strikes; OTM strikes suit small positions on large expected moves.
What does ATM mean in options?
At the money: the strike closest to the current price of the underlying. With Nifty at 25,000, the 25,000 strike is ATM for both calls and puts.
Can an option change from OTM to ITM?
Yes. Moneyness changes with the underlying's price. A 25,200 call is OTM with Nifty at 25,000 and ITM once Nifty rises above 25,200.
Why do OTM options lose value so fast near expiry?
Their whole price is time value, and time value falls to zero at expiry. With no intrinsic value to keep, an OTM option that stays OTM expires worthless.
Are the ITM and OTM strikes the same for calls and puts?
No. A strike below the index is ITM for calls and OTM for puts; a strike above it is the reverse. Only the ATM strike is the same for both.