Put Option moneyness: What it is and how to use it

Moneyness for a Put option is different from that of Call option. For a quick recap we sell Put option if our view is bullish and we buy Put option if our view is bearish. What is ITM in Call option is OTM for Put option and what is OTM in CE it is ITM for Put option. Let us find out how strikes are classified as ITM, ATM and OTM for Put options. The option chain derived from the NSE website shows strike prices ranging from 16650 to 19300. There are multiple option premiums also for various strike prices.

Considering Nifty is currently trading at 18560 approximately. So, the nearest ATM put option strike price is 18550.

The intrinsic value of the Put option can be calculated as = Strike – Spot. We will now pick a few strikes above and below the ATM and figure out ITM and OTM options. Let us go with the following strikes and evaluate their respective intrinsic value (also called the moneyness)

@18400

Intrinsic Value = 18400-18550 = -150

Negative intrinsic value, therefore, option is OTM.

@18500

IV = 18500-18550 = -50

Negative intrinsic value, therefore, option is OTM.

@18600

IV = 18600-18550 = 50

Positive intrinsic value, therefore, the option is ITM.

@18700

IV = 18700-18550 = 150

Positive intrinsic value, therefore, the option is ITM.

Hence, we observe in put option

• All strikes higher than ATM options are considered ITM.

• All strikes lower than ATM options are considered OTM.

The premiums for ITM options are much higher than the premiums for the OTM options. Now we have a clear understanding of how option strikes are classified based on their moneyness. Classifying the option strikes will help us in understanding the Option Greeks and their impact on the premiums better.

(The author is a homemaker, who dabbles in stock market investments in free time)