In this video, we will talk about the 3 major types of Options Contracts i.

In this video, we will talk about the 3 major types of Options Contracts i.e. ATM – At The Money, OTM – Out of The Money and In The Money contracts. This is also known as the moneyness of Options. Moneyness is a term which describes the relationship between Spot Price of the underlying asset, and the Strike Price which is the pre-determined price at the premium.

An Option Premium has two parts – Intrinsic value of an Option Premium and Time Value of an Option Premium. Intrinsic Value is the current value of the option which shows us how much worth it is. The time value of an option is an additional amount which the buyer is willing to pay over the current intrinsic value.

ITM contracts are those which have a positive intrinsic value. A call option in ITM contract is the one in which the strike prices is lesser than the current Spot Price. A Put Option in ITM contract is the one in which the spot price is lesser than the strike price.

ATM contracts are those contracts where the strike price is exactly equal to the spot price. The contract has its intrinsic value as zero as both the strike and spot prices are equal.

An OTM contract is the one where there is no intrinsic value. In call option in OTM contract, the strike price is more than the spot price and in put option in OTM contract, the spot price is higher than the strike price. Hence, if we are a buyer in Options, we should try to buy ATM options or slightly OTM options in order to avoid higher risk.

In case of a seller of an option, OTM options are better as the seller has a greater chance for the options not getting exercised.