One of the most common questions a beginner trader asks is: "Which strike price should I buy?" If you expect Nifty to go up, there are over 50 different Call options available. Some cost ₹500, while others cost ₹5. Choosing the wrong one is the #1 reason why traders lose money even when they get the market direction right.
Moneyness is the term used to describe the relationship between the Strike Price of an option and the current Spot Price of the underlying asset. It tells you whether an option has "real" value or just "hope" value.
The position of the Spot Price relative to your Strike determines the category.
1. In-the-Money (ITM): The "Rich" Options
An In-the-Money option is one that already has Intrinsic Value. If you were to exercise this option right now, you would walk away with cash. These options are expensive because they are "already winning."
- Call Options: A Call is ITM when the Spot Price > Strike Price. (e.g., Nifty is at 22,500 and you hold a 22,400 Call).
- Put Options: A Put is ITM when the Spot Price < Strike Price. (e.g., Nifty is at 22,500 and you hold a 22,600 Put).
Why trade ITM? They move almost 1:1 with the stock price. If the stock moves ₹10, an ITM option might move ₹8 or ₹9. They have less "time decay" risk compared to other categories.
2. At-the-Money (ATM): The "Flipping" Point
An At-the-Money option is one where the Spot Price is equal (or very close) to the Strike Price. For example, if Nifty is trading at 22,512, the 22,500 Strike is considered ATM.
ATM options are the most active and liquid contracts in the market. They have zero intrinsic value (or very little), meaning their entire premium is made of Time Value. These are the most sensitive to market moves—small changes in the stock price can cause large percentage swings in ATM premiums.
3. Out-of-the-Money (OTM): The "Lottery Tickets"
An Out-of-the-Money option has zero intrinsic value. If you exercise it now, you get nothing. The only reason these options have a price is the "hope" that the stock will move enough to become ITM before the expiry date.
- Call Options: A Call is OTM when the Spot Price < Strike Price. (e.g., Nifty at 22,500, Strike 22,800).
- Put Options: A Put is OTM when the Spot Price > Strike Price. (e.g., Nifty at 22,500, Strike 22,200).
The Trap: Beginners love OTM options because they are cheap (₹5 or ₹10). They think, "If Nifty moves 300 points, my ₹5 will become ₹100!" While possible, the probability of this happening is very low. Most OTM options expire at ₹0.
4. Call vs. Put Moneyness Matrix
This is where most students get confused. Remember that Calls and Puts are mirror images of each other. What is ITM for a Call is OTM for a Put.
| Condition | Call Option (CE) | Put Option (PE) |
|---|---|---|
| Spot > Strike | ITM (Winning) | OTM (Losing) |
| Spot = Strike | ATM (Neutral) | ATM (Neutral) |
| Spot < Strike | OTM (Losing) | ITM (Winning) |
5. Probability and the "Delta" Connection
In the professional world, moneyness is often described using a Greek called Delta (which we will study in Module 10).
- ITM Delta: High (0.7 to 1.0). High probability of staying profitable.
- ATM Delta: Around 0.5. It's a 50/50 toss-up.
- OTM Delta: Low (0.1 to 0.3). Low probability of finishing "in the money."
On the day of expiry, any option that is still OTM or ATM will immediately drop to ₹0. Only ITM options retain their value. This is why "Hero or Zero" trades usually happen in OTM strikes.
Summary of Module 06
Understanding moneyness allows you to choose the right "tool" for your market view. If you want safety and consistency, go for ITM. If you want high-risk leverage, you might look at ATM or slightly OTM.
- ITM options have high intrinsic value and move fast.
- ATM options are the most sensitive to immediate price changes.
- OTM options are cheap but lose value rapidly as time passes.
- Always check the Spot-Strike relationship before clicking 'Buy'.
Now that you can categorize options by their "worth," how do we actually calculate the exact price of the premium? Why does a ₹100 move in Nifty sometimes increase the premium by ₹50 and sometimes by only ₹10? We explore the math in the next module: Option Pricing.