When you are involved in trading, there are many aspects of trading that you may come across, like trading techniques or strategies that help you make profits. You should know what is behind the idea of executing them, so that you can make the most of them. For instance, a call option is a financial contract that gives the buyer of the option the right (not the obligation) to buy an asset at a fixed price in a particular period of time. The asset may be a bond, commodity or a stock. This is usually called an underlying asset.
To understand what an ITM option and an OTM option consist of, you need to know what a strike price is first. The predetermined price at which a contract can be sold or bought is called the strike price. In call options, the strike price is that price at which the security can be bought by the holder of the option.
‘In the money’, or ITM, is an option with a strike price that has gone beyond the present price of the stock. If you are beginning to understand what an ITM option is, you will also understand what an ‘out of money’, or OTM option, means. An OTM option has a strike price that the underlying stock has still to reach. Hence, here, the option has no real intrinsic significance or value. So, if you want to compare the ITM and OTM options, the difference between the two is the position of the strike price, relative to the stock’s value in the market. The market value of any underlying security or stock is referred to as its ‘moneyness’.
Whether in online share trading or offline trading, an ITM option is useful. For instance, an investor may wish to hedge, or hedge in a partial way, their place/position. Traders may also wish to purchase an option with some amount of intrinsic value, not merely value in terms of time. As an ITM option has a value that is intrinsic and is priced at more than an OTM option, the price shift, percentage-wise, is quite small. This does not mean that an ITM option will not have large shifts in price. They do show large shifts, but not compared with OTM options.
The market is an open book, and as a trader, you can pick and turn any page you want. You have to know that particular tactics call for the use of ITM options, while others use OTM options. When you are trading with a proficient broker like Motilal Oswal, you can learn more about these.
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