Options can be classified into three categories, viz., in-the-money, at-the-money and
out-of-the-money options.
- In-the-money (ITM) option: This option would give the option holder a positive cash flow, if it were exercised immediately. A call option is said to be ITM, when spot price is higher than strike price. A put option is said to be ITM when spot price is lower than strike price. In our examples, the call option is in-the-money.
- At-the-money (ATM) option: At-the-money option would lead to zero cash flow if it were exercised immediately. Therefore, for both call and put ATM options, strike price is equal to spot price.
- Out-of-the-money (OTM) option: Out-of-the-money option is one with strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price. A put option is said to be OTM when spot price is higher than strike price. In our examples, the put option is out-of-the-money.
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