Option Education

[Newly2b]

Lee doesn't seem to be around today, so let me take a stab at clarifying this issue for you.

ATM, ITM and OTM refers to the relationship between the strike price of the option and the actual price of the underlying's shares. So, if the underlying is trading at 80, and you buy an 80 call, that call is ATM. An ITM call would be any call with a strike below 80 and an OTM call would be any call with a strike above 80. An ITM Put would be any put with a strike above 80 and an OTM put would be any put with a strike below 80.

Perhaps this is what confuses you: a call option may be ATM when you buy it and a few minutes later if the price of the underlying shares rises, the call may be now be ITM, if it falls, the call may be OTM. The strike price of the option has not changed, but the price of the underlying shares has, which changes the relationship. The strike of the option you hold never changes, but the price of the option will depending on changes in the price of the underlying shares, and that changes whether the option is ATM, ITM or OTM.

If you are buying calls your profit lies in having the price of the option rise when the price of the underlying rises and if you are buying puts your profit lies in having the price of the option rise when the price of the underlying drops.

Hope this helps.

Newly