ITM: has less leverage but much better in terms of risk, ITM has intrinsic value, whereas OTM has none. At expiration it is not worthless, you can sell it for whatever the strike-underlying spread is. Also has much less decay. It's less attractive for retail traders but for the most part all around better.
Out-of-the-Money Call Options
Traders can buy OTM call options when they anticipate the underlying asset's price will rise significantly before the option's expiration date; however, if the asset's price doesn't reach the strike price by expiration, the OTM call option becomes worthless.
The simple answer is that when you buy an option already in the money (ITM), the odds of its still being in the money at expiration are higher. It carries lower risk than buying an out of the money (OTM) option. An option has extrinsic value and intrinsic value.
For example, a call option with a strike price of $132.50 would be considered ITM if the underlying stock is valued at $135 per share because the strike price has already been exceeded. A call option with a strike price above $135 would be considered OTM because the stock has not yet reached this level.
Compared to At-The-Money (ATM) or Out-of-The-Money (OTM) options, ITM call options have lower risk. They have a higher chance of expiring profitably since the stock price is already in a profitable range.
In certain market conditions, if the underlying asset's price makes a significant move in the anticipated direction, OTM options can result in potentially substantial gains due to their leverage.
Disadvantages of ITM options
Greater potential loss: Buying an ITM option requires more money, all else equal, so the trader has more money on the line in an option that could expire worthless. While the potential loss is greater with an ITM option, it has a lower likelihood of happening.
"Out of the money" (OTM) refers to a situation where the strike price is higher than the market price for a call, or lower than the market price for a put. Professional traders may exercise OTM options at the time of expiration in order to eliminate risk.
Manage time decay: When trading options, be mindful of time decay (theta). If options are out of the money, avoid holding them until expiration, as time decay accelerates as expiration approaches. Avoid speculation: Avoid purely speculative trading without a well-reasoned strategy.
Your options contract may not sell if there aren't enough buyers, especially if the contract has low open interest, is far from the money, or close to expiration.
Buying a long out-of-the-money (OTM) put is a very simple option strategy. It is very similar to the Long Put ATM, but you're buying an out-of-the-money put instead, which will have a lower initial cost. As a result, however, the stock will have to make a larger move to the downside in order for you to profit.
As options approach their expiration date, they lose value due to time decay (theta). The closer an option is to expiration, the faster its time value erodes. If the underlying asset's price doesn't move in the desired direction quickly enough, options buyers can suffer losses as the time value diminishes.
Optimal conditions for selling in-the-money call options involve high implied volatility and a bearish or stagnant outlook on the underlying asset. Risks exist but are generally manageable, making this a potentially lucrative strategy for those looking to generate income from options trading.
Deep out of the money is a trading strategy. These options have the potential for generating immense payout, but the probabilities of this are low. A deep out-of-the-money option has a strike price significantly above (call) or below (put) the current price of the underlying asset.
ITM Power PLC has 47.96% upside potential, based on the analysts' average price target. ITM Power PLC has a consensus rating of Hold, which is based on 2 buy ratings, 2 hold ratings and 1 sell ratings. The average share price target for ITM Power PLC is 53.80p.
OTM and ATM option contracts expire worthlessly. The entire amount paid as a premium will be lost.
Out-Of-The-Money (OTM)
If this happens, the trader would lose all value paid for the option up front and realize max loss. Prior to expiration, the trader can exit the position by selling it for the market value. If it's worth more than what they paid for it, they would realize a profit.
Call sellers generally expect the price of the underlying stock to remain flat or move lower. If the stock trades above the strike price, the option is considered to be in the money and will be exercised. The call seller will have to deliver the stock at the strike, receiving cash for the sale.
The choice between ITM, ATM, or OTM options depends on your strategy and market outlook. ITM options offer immediate value and are less risky, ATM options balance risk and reward, while OTM options have higher return potential but come with increased risk due to their lack of intrinsic value.
In the money options are more expensive in dollar terms than other moneyness options because of the intrinsic value held in ITM options. ITM options have a smaller gain in percentage terms versus ATM and OTM options with the same price move in the underlying asset.
An Example
Let us take an OTM call option example. Consider a trader who has a 250 ITC January 20 call option, which entitles them to buy ITC stock at ₹250 per share once the contract expires. If the stock price is less than ₹250, let's say at ₹220, this call is termed out-of-the-money.
At expiration, though, an option is worthless if it is OTM. Therefore, if an option is OTM, the trader will need to sell it prior to expiration in order to recoup any extrinsic value that is possibly remaining.
When the price of the underlying asset in an option is equal to its strike price, it is at the money. If it has not yet reached that point, it is out of the money, and if it has exceeded it then is in the money. These terms apply to both call options and put options.