When you open your broker's app to trade Nifty options, you are bombarded with dozens of Strike Prices. Some are expensive (₹500), some are cheap (₹10). How do you choose?
The answer lies in understanding Moneyness—the relationship between the current Spot Price and the Strike Price.
1. The Three States
Let's assume the Nifty Spot Price is 18,000.
A. In The Money (ITM)
Options that already have value. They have already "won."
Call (CE): Strikes below 18,000 (e.g., 17,900 CE).
Put (PE): Strikes above 18,000 (e.g., 18,100 PE).
Characteristic: Most expensive, highest probability of profit.
B. At The Money (ATM)
The Strike Price closest to the current Spot Price.
ATM Strike: 18,000 CE and 18,000 PE.
Characteristic: Highest liquidity (most traded), medium cost.
C. Out of The Money (OTM)
Options that have zero intrinsic value yet. They are "hope" trades.
Call (CE): Strikes above 18,000 (e.g., 18,200 CE).
Put (PE): Strikes below 18,000 (e.g., 17,800 PE).
Characteristic: Very cheap, but very low probability of profit.
2. Intrinsic Value vs. Time Value
Why is an option priced at ₹150? This Premium is made of two components:
| Type | Intrinsic Value | Time Value |
|---|---|---|
| ITM | Real Value (Difference between Spot & Strike) | Small amount |
| ATM | Zero | Maximum (100% Time Value) |
| OTM | Zero | 100% Time Value (Pure Hope) |
3. The "Lottery Ticket" Trap
Beginners love buying deep OTM options because they are cheap (e.g., ₹5 or ₹10).
Why is this dangerous? Because OTM options have Zero Intrinsic Value. Their price is made up entirely of Time Value. As expiry approaches, Time Value decays rapidly to zero.
If the market doesn't make a massive move, your OTM option will expire worthless (₹0), resulting in a 100% loss of capital.
4. Which Strike Should You Trade?
There is no single answer, but here is professional guidance:
- Option Buyers: Stick to ATM or slightly ITM. You need the price to move, and these strikes react fastest. Avoid deep OTM.
- Option Sellers: Prefer OTM. Since the probability of OTM expiring worthless is high, sellers collect the premium and let time decay work in their favor.