An option is considered ATM when its strike price is equal to the current Underlying Asset price. It doesn’t have intrinsic value but has a higher time value.
An option is considered ITM if its strike price is lower than the current Underlying Asset price (for call options) or higher than the current Underlying Asset price (for put options). ITM options have intrinsic value.
An option is considered OTM if its strike price is higher than the current Underlying Asset price (for call options) or lower than the current Underlying Asset price (for put options). These options don’t have intrinsic value but could become profitable if the market moves favourably.
ATM: Minimal intrinsic value, balanced risk/reward. ITM: Higher premiums, lower risk, greater likelihood of exercise. OTM: Lower premiums, higher risk, higher potential reward.
Assessing Risk: Evaluating risk based on option type. Determining Profit Potential: Understanding intrinsic and extrinsic values for potential returns. Strategic Positioning: Aligning option choices with market outlooks.