In-the-Money / Out-of-the-Money Definition
In the field of options trading within the world of cryptocurrency and blockchain, ‘In-the-Money’ (ITM) refers to a situation where an option holds intrinsic value. Conversely, ‘Out-of-the-Money’ (OTM) signifies that an option has no intrinsic value. The ITM and OTM concepts are used in trading to indicate the relative position of an underlying asset price to the price of a derivative.
In-the-Money / Out-of-the-Money Key Points
- In-the-Money indicates an option with intrinsic value
- Out-of-the-Money signifies an option without intrinsic value
- The concepts ITM and OTM denote the position of an underlying asset price relative to the derivative’s price
- These terms are used predominantly in options trading
What Does In-the-Money / Out-of-the-Money Mean?
ITM is a term used when the option offers positive cash flow should it be exercised immediately. For a ‘call’ option, an ITM state happens when the underlying asset’s price exceeds the strike price. In contrast, OTM, for a ‘call’ option, is when the underlying asset’s price is less than the strike price.
When Are They Used?
These concepts, ITM and OTM, are predominantly used in the world of options trading, a sector within the cryptocurrency and blockchain industry.
Where Are They Used?
They are used in diverse options trading arenas, including Forex, commodities, equities, and cryptocurrencies. Traders utilize these terms to precisely describe the positioning of an option’s strike price relative to the market price of the underlying asset.
Why Are They Important?
The terms ITM and OTM are important as they enable traders to understand the value and risk associated with options at a glance. These states not only contribute to the pricing of options but also allow traders to strategize and anticipate the potential profitability of investing in particular options.
How Do They Impact Trading?
These states impact trading significantly. For instance, knowing that an option is ITM helps traders understand the existing profits they stand to achieve should they choose to exercise the option. Conversely, an OTM state makes it clear that the option will result in a loss if exercised immediately but may potentially be profitable if the market conditions change favorably.
