ITM, ATM, OTM & Intrinsic/Time Value

What this unit covers

Learn to classify an option as in the money, at the money or out of the money, and to split its premium into intrinsic value and time value.

By the end you will be able to

• Classify a call or put as ITM, ATM or OTM by comparing strike to spot.
• Calculate intrinsic value and explain why it is never negative.
• Split a premium into intrinsic value and time value.

How it starts: One Price, Two Different Truths

1. You open an option chain for one stock at one moment.
2. Two calls on the same stock cost 35 rupees and 12 rupees.
3. What part of each price is already real, and what part is just hope?

Words you will meet

Intrinsic Value

The payoff an option would give if exercised right now, never negative.

Time Value

What remains of a premium after subtracting intrinsic value, the part paid for future chance.

In-the-Money (ITM)

An option whose strike position versus spot means exercising now would pay off.

At-the-Money (ATM)

An option whose strike is essentially equal to the current spot price.

Out-of-the-Money (OTM)

An option whose strike position versus spot means exercising now would pay nothing.

Premium

The market price paid to buy an option.

In this module: Options Fundamentals

1. Calls and Puts
2. Strike, Expiry & Premium
3. Buyer and Seller Roles
4. ITM, ATM, OTM & Intrinsic/Time Value (this unit)