Moneyness in Options: ITM, ATM and OTM with a Worked Nifty Example

What moneyness actually means

Moneyness is a simple comparison: where is the current price of the underlying relative to the strike price of your option. It answers one question. If you could exercise this contract this instant, would it pay you anything? The amount it would pay is the intrinsic value, and moneyness is just the label we put on that situation. It is not a forecast and it is not the premium you pay. It is a snapshot of right now.

Every listed option falls into one of three buckets. In the money (ITM) means the option already has intrinsic value. At the money (ATM) means the strike sits at or very close to the current spot, so intrinsic value is roughly zero. Out of the money (OTM) means the option has no intrinsic value at all; everything you pay for it is time value and volatility. On the NSE option chain you will see ITM strikes shaded on one side and OTM strikes on the other, with the ATM strike near the centre.

The direction flips between calls and puts. A call gives the right to buy, so it gains value as spot rises above the strike. A put gives the right to sell, so it gains value as spot falls below the strike. That is why the same spot level makes a low strike call deep ITM while making a low strike put deep OTM at the same time.

The three buckets defined precisely

• In the money call: spot price is above the strike. Example, Nifty at 24,800 and you hold the 24,500 call. It is ITM by 300 points.
• In the money put: spot price is below the strike. Example, Nifty at 24,800 and you hold the 25,000 put. It is ITM by 200 points.
• At the money: the strike closest to spot. With Nifty at 24,800 and strikes listed in steps of 50, the 24,800 strike is ATM for both the call and the put.
• Out of the money call: spot is below the strike. Nifty at 24,800, the 25,100 call is OTM. It has no intrinsic value.
• Out of the money put: spot is above the strike. Nifty at 24,800, the 24,500 put is OTM. It has no intrinsic value.

Worked Nifty example: spot, strikes and intrinsic value in rupees

This is the part most explanations get wrong, so let us be exact. The Nifty 50 index is quoted in points, not rupees. Each point of an option is worth rupees only when you multiply by the lot size, which is 65 for Nifty. So intrinsic value in rupees equals the in the money points times 65 per lot. Assume the spot Nifty 50 is at 24,800 with a weekly expiry a few days away. All numbers below are illustrative.

Read the table carefully. The 24,500 call is ITM by 300 points, so its intrinsic value is Rs 19,500 per lot of 65. The 25,000 put is ITM by 200 points, worth Rs 13,000 per lot. The two ATM contracts at 24,800 have zero intrinsic value; their entire premium is time value. The 25,100 call and the 24,500 put are OTM, so their intrinsic value is exactly zero. If Nifty expired today at 24,800, both would settle worthless and the buyer would lose the full premium paid.

Now bring in the premium. Suppose the 24,800 ATM call trades at 120 points. That premium costs you 120 x 65 = Rs 7,800 per lot, and every rupee of it is extrinsic. Suppose the 24,500 ITM call trades at 360 points, which is Rs 23,400 per lot. Of that, Rs 19,500 is intrinsic and the remaining 360 minus 300 = 60 points, or Rs 3,900, is time value. The ITM option costs more in absolute rupees but carries less time value at risk, which is exactly why ITM and OTM suit different trades.

A full profit and loss walkthrough with charges

Say you buy one lot of the Nifty 24,800 call at 120 points on Monday and Nifty rallies to 25,000 by Wednesday. The intrinsic value is now 200 points and the option, with a little time value left, trades around 230 points. You sell. The gross gain is 230 minus 120 = 110 points, which is 110 x 65 = Rs 7,150 per lot before costs. Illustrative only.

Costs in India are real and you must net them out. On options, STT is charged at 0.15 percent on the sell side premium value (revised from 1 April 2026). Your sell premium value is 230 x 65 = Rs 14,950, so STT is roughly Rs 22.43. Brokerage on a discount broker is commonly a flat 20 rupees per order, so about Rs 40 for buy plus sell. Add exchange transaction charges, SEBI fees, 18 percent GST on brokerage and exchange charges, and stamp duty on the buy side. Total statutory and broker costs on a single lot of this size typically land in the rough range of Rs 90 to Rs 130. Net profit is therefore close to Rs 7,020 to Rs 7,060 per lot, not the headline Rs 7,150.

Intrinsic value versus extrinsic value

Moneyness only describes intrinsic value. The premium you actually pay is intrinsic value plus extrinsic value, and extrinsic value is made of two things: time value and the market price of volatility. An ATM or OTM option is entirely extrinsic. A deep ITM option is mostly intrinsic with a thin shell of extrinsic value.

This split matters for your risk. When you buy an OTM option, you are buying pure hope; if the move does not come, the whole premium decays away. When you buy a deep ITM option, most of your money sits in intrinsic value that moves rupee for rupee with the index, and only the small extrinsic part is exposed to time decay and falling volatility. That is why hedgers often prefer ITM options while lottery style speculators chase cheap OTM strikes.

How moneyness drives the premium

Because ITM options carry intrinsic value, they always cost more in absolute rupees than OTM options on the same expiry. But cost is not the same as value. The OTM premium is small precisely because the market thinks it is unlikely to finish in the money. You are paying little for a long shot. The ATM premium is where time value peaks, since a small move in either direction can swing the option ITM or OTM, so uncertainty and therefore extrinsic value are highest at the ATM strike.

Implied volatility magnifies all of this. When volatility is high, for example around an RBI policy day, a budget, or a big earnings print, extrinsic value swells and even OTM options get expensive. When volatility collapses after the event, premiums deflate fast, an effect traders call volatility crush. So two options at the same moneyness can carry very different premiums on different days purely because the market is pricing different amounts of expected movement.

• ITM options are expensive in rupees but carry mostly intrinsic value that is not at risk from time decay.
• ATM options carry the most time value, so they lose value fastest as expiry nears if the index does not move.
• OTM options are cheap but most expire worthless. They need a real move to pay off.
• Rising implied volatility lifts all premiums; falling volatility crushes them, often right after the event you were waiting for.

Moneyness and time decay near expiry

Nifty has weekly expiries and a monthly expiry on the last week. As expiry approaches, time value bleeds out faster, and this hits ATM and OTM options hardest because they have nothing but time value to lose. An OTM weekly option can lose most of its premium in a single afternoon if the index sits still. This is theta at work, and it is why selling OTM options near expiry is a popular, though risky, income strategy.

On expiry day itself, moneyness becomes brutal and binary. An option that is even one point ITM has intrinsic value and settles for that amount, while an option one point OTM settles at zero. Indian index options are cash settled on the final settlement price, so you receive or pay the intrinsic value in rupees rather than taking delivery. A trader holding the 24,800 call into expiry needs Nifty to close above 24,800 just to recover a single point of intrinsic value, and well above 24,920 to beat a 120 point purchase price.

Using moneyness to pick a strategy

Moneyness is the first lever you pull when designing a position. If you want a high probability hedge for a stock or index holding, a slightly ITM option gives you a delta near 1, so it tracks the underlying closely and protects you point for point. If you want a cheap directional bet and accept that you will often lose the whole premium, an OTM strike on a weekly expiry gives maximum leverage for minimum outlay.

Multi leg strategies combine moneyness deliberately. A bull call spread on Nifty might buy the 24,800 call and sell the 25,100 OTM call to cut cost. A straddle buys the ATM call and put together to profit from a big move in either direction, which is why traders set them before high volatility events. A strangle buys an OTM call and an OTM put, cheaper than a straddle but needing a larger move. Each choice is really a choice about which moneyness buckets to combine.

• Hedging a portfolio: prefer ITM or near ATM options for tight tracking of the underlying.
• Low cost directional punt: OTM weekly options, accepting a high chance of total loss.
• Bull call or bear put spreads: pair an ITM or ATM long with an OTM short to reduce premium outlay.
• Straddle: ATM call plus ATM put for an event driven volatility bet.
• Strangle: OTM call plus OTM put for a cheaper, wider volatility bet.

Liquidity, the option chain and choosing a strike

Moneyness also affects how easily you can get in and out. On the NSE option chain, strikes near the ATM level for Nifty and Bank Nifty carry the deepest liquidity, with tight bid ask spreads and high open interest. Far OTM and very deep ITM strikes can have wide spreads, so a quoted premium may not be a price you can actually trade at scale. Always check the bid ask spread and the volume before assuming you can exit cleanly.

Open interest at different strikes also tells a story. Large open interest at an OTM call strike often marks a level the market treats as resistance, and heavy put open interest below spot marks support. While this is sentiment rather than certainty, it helps you read where other traders have positioned across the moneyness spectrum, which is useful when you decide which strike to trade.

Common mistakes traders make with moneyness

• Confusing moneyness with profit. An ITM option can still lose money if you paid more in premium than its intrinsic value grows to.
• Forgetting the lot multiplier. A 100 point move on Nifty is Rs 7,500 per lot, not Rs 100. Always think in rupees per lot.
• Treating OTM premium as intrinsic value. OTM options have zero intrinsic value; you are buying time and volatility only.
• Ignoring charges and tax. STT on the sell side, GST, stamp duty and slab rate business income tax all reduce the headline gain.
• Buying cheap OTM weeklies and being surprised they expire worthless. Cheap usually means unlikely, and time decay accelerates near expiry.

The deepest mistake is mental: assuming that because an option is in the money, the trade is winning. Moneyness describes the contract at this instant, not your position. Your profit depends on the premium you paid, the charges you incurred, and where the underlying goes from here. Keep those three things separate in your head and most option confusion disappears.

Sources and further reading

For authoritative data and current contract specifications, refer to NSE India, Zerodha Varsity and Investopedia. Lot sizes, STT rates and tax rules change periodically, so always confirm the current numbers on the official source before you trade. Nothing here is investment advice or a promise of returns.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE India, Zerodha Varsity and Investopedia. Always confirm current rules, rates and contract specifications on the official source before you trade.