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What are ITM and OTM Call Options in Trading

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Published Date: 08 Jan 2022Updated Date: 05 Jan 20236 mins readBy MOFSL
Trading Call Options

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. 

  • A Strike Price

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. 

  • What are ITM and OTM?

‘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 â€˜moneyness’. 

  • More to Know

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. 

  • Trading 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. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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