NISM Series XVI - Commodity Derivatives Exam Notes
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In the money (ITM) option would give 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. And, a put option is said to be ITM when spot price is lower than strike price.
At the money (ATM) 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 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.
Time value is the difference between premium and intrinsic value, if any, of an option.
ATM and OTM options will have only time value because the intrinsic value of such options is zero.
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