In-the-Money / Out-of-the-Money

November 21, 2023 - Around 2 mins mins to read

Understanding In-the-Money / Out-of-the-Money

Options trading is a widely used tool in traditional stock market investing that allows traders to speculate on stock prices. With the rise of cryptocurrencies, many exchanges now offer options trading for tokens as well.

In-the-money (ITM) and out-of-the-money (OTM) are terms used to describe the type of position a trader takes based on the current price of an asset or cryptocurrency. Options trading enables investors to make predictions about the future price of an asset and potentially profit from it.

ITM options trading occurs when an investor places a bet on a price that the asset has already surpassed. This type of trading is often used as a hedge against a position. ITM option trades have both time value and intrinsic value, making them less risky investments due to smaller price fluctuations. Investors can use various trading tools, such as puts and calls, to place ITM options.

OTM option trades are similar to ITM trades, but the investor bets on a price that the asset or token has not yet reached. In this case, OTM investments only have time value, as the asset has not yet reached the price specified by the investor. OTM options are usually cheaper than ITM options because they lack intrinsic value. Investors who believe an asset’s price will increase in the future often prefer OTM options.

Options trading is gaining popularity among cryptocurrency traders due to the high volatility and significant price fluctuations in the crypto market. Cryptocurrencies like Bitcoin and Ethereum, known for their substantial volatility, are particularly suitable for options trading.

While cryptocurrency trading differs from traditional stock market trading, certain principles and trading tools apply to both markets. ITM and OTM are two crucial mechanisms in the trading world, and they have also been introduced in cryptocurrency trading.