Moneyness describes where an option's strike sits relative to the current level of the underlying. It tells you at a glance whether the option would be worth anything if it expired right now, and it shapes almost everything else about the option: its premium, its delta, how fast it decays and how it is settled.
The three states
| Call (CE) | Put (PE) | |
|---|---|---|
| In the money (ITM) | Strike below the index level | Strike above the index level |
| At the money (ATM) | Strike at or nearest to the index level | Strike at or nearest to the index level |
| Out of the money (OTM) | Strike above the index level | Strike below the index level |
Because exact equality is rare, traders call the strike closest to the current level "the ATM strike". On the NSE option chain, in-the-money strikes are shaded.
A Nifty example
Say Nifty is "at 25,000" with 7 days to a weekly expiry. Here is how three strikes look for calls and puts, using illustrative model prices at 14% IV.
| Option | Moneyness | Intrinsic value | Premium | Delta |
|---|---|---|---|---|
| 24,800 CE | ITM by 200 points | ₹200.00 | ₹329.55 | 0.69 |
| 25,000 CE | ATM | ₹0.00 | ₹209.21 | 0.53 |
| 25,200 CE | OTM by 200 points | ₹0.00 | ₹121.26 | 0.37 |
| 25,200 PE | ITM by 200 points | ₹200.00 | ₹289.86 | -0.63 |
| 25,000 PE | ATM | ₹0.00 | ₹178.07 | -0.47 |
| 24,800 PE | OTM by 200 points | ₹0.00 | ₹98.65 | -0.31 |
About these numbers
All numbers here are illustrative: Nifty "at 25,000", implied volatility 14%, interest rate 6.5%, computed with the Black–Scholes model. They are not current market prices.
How moneyness changes the option
| ITM | ATM | OTM | |
|---|---|---|---|
| Premium | Highest: intrinsic plus time value | Middle: all time value, and the most of it | Lowest: all time value |
| Delta (calls) | Towards 1 | Around 0.5 | Towards 0 |
| Time decay in rupees | Moderate | Largest | Smaller in rupees, but a large share of a small premium |
| Gamma near expiry | Lower | Highest | Lower, but can jump if the index approaches the strike |
| At expiry if nothing changes | Worth its intrinsic value | Close to zero | Expires worthless |
Deep ITM and far OTM
Traders also talk about how far in or out of the money an option is. A deep in-the-money option behaves almost like the index itself: its delta is near 1 (or -1 for a put) and most of its premium is intrinsic value. A far out-of-the-money option is the opposite: a small premium that is all time value and a delta near zero. Its price can rise many times over on a sharp move, which is what makes it attractive to some buyers, and it usually expires worthless, which is why it is attractive to some sellers. Neither feature removes the risk on the other side.
Moneyness and liquidity
On Indian index options most trading happens in strikes near the money and a few hundred points either side. Deep in-the-money strikes often have wide bid-ask spreads and few trades, so their quoted LTP can be stale. Check the bid and ask on the option chain before placing an order on any strike far from the current level.
Moneyness is not fixed
An option's moneyness changes every time the index moves. The 25,200 CE is out of the money with Nifty at 25,000, but becomes in the money if Nifty rises above 25,200. What matters for settlement is moneyness at expiry, measured against the final settlement price set by the exchange.
Why moneyness matters at expiry
- Index options are cash-settled. An ITM index option left open to expiry is exercised automatically and the intrinsic value is paid out; STT is charged on that settlement value.
- Stock options are physically settled. An ITM stock option left open to expiry turns into a delivery of shares, which needs the full cash or shares. See our guide on physical settlement.
- OTM options at expiry simply expire worthless; the buyer loses the premium and the seller keeps it.
Cheap OTM options are not cheap bets
A far out-of-the-money option has a small premium because the market thinks it is unlikely to pay. Most expire worthless. A low price per lot does not mean a low chance of losing all of it.
Examples use illustrative values, not current market data. This is general education, not investment advice.