Price of Crypto Options and Understanding ATM, OTM, ITM

Options are a very interesting topic that needs to be studied before entering it and starting trading. Let’s learn about how its price or premium is formed and the differences between At-the-Money (ATM), Out-of-the-Money (OTM) and In-the-Money (ITM) options.

👩🏻‍💼 Author: Alexandra is a beginner trader of Bitcoin and Ethereum options.

“My passion for learning about the new world of cryptocurrency and my love for analytics and forecasts help me in trading. I want to help the same beginners understand all the nuances of crypto options.”

⏰ Time reading: 4 min 📆 Data: 2024/11/12 📆 Update: 2024/11/12

Understanding Crypto Options Pricing

The price of an option is also known as its “premium.” This premium is influenced by several factors:

1. Intrinsic Value: This is the difference between the current price of the underlying asset and the strike price of the option. For call options, the intrinsic value is the current asset price minus the strike price, if this difference is positive. For put options, it’s the strike price minus the current asset price.е
2. Time Value: This refers to the additional premium that reflects the potential for the option to gain value before it expires. Generally, the more time until expiration, the higher the time value, because there is more time for the underlying asset’s price to move in a favorable direction.
3. Volatility: Higher volatility in the underlying asset increases the likelihood of significant price movements, making options more expensive. This is because there is a higher chance that the option will move into a profitable position before expiration. Understanding the relationship between volatility and option premiums is crucial — Bitcoin options volatility analysis provides in-depth insights.
4. Interest Rates and Dividends: Although not as influential as the other factors, interest rates and expected dividends (if any) of the underlying asset can also affect option prices. In the case of crypto, where dividends are typically non-existent, interest rates might play a more significant role.

ATM, OTM, and ITM Options

Understanding the concepts of At-the-Money (ATM), Out-of-the-Money (OTM), and In-the-Money (ITM) is key to grasping the nuances of option pricing and trading strategies.

1. At-the-Money (ATM):
   • An option is considered ATM when the strike price is very close to the current market price of the underlying asset. For instance, if Bitcoin is trading at $30,000, a call or put option with a strike price of $30,000 would be ATM.
   • ATM options have little to no intrinsic value but can have significant time value. They are popular because they offer a balance between risk and reward, and the premiums are moderate.
2. Out-of-the-Money (OTM):
   • An option is OTM when the strike price is less favorable than the current market price. For a call option, this means the strike price is above the current market price; for a put option, it’s below.
   • OTM options have no intrinsic value—only time value. They are cheaper to purchase but riskier, as they require a substantial price movement to become profitable. Traders often use OTM options for speculative plays or as part of more complex strategies, like spreads.
3. In-the-Money (ITM):
   • An option is ITM when it would result in a profit if exercised immediately. For a call option, this means the strike price is below the current market price, and for a put option, it’s above.
   • ITM options have intrinsic value, making them more expensive. They are considered safer because they have a higher probability of being profitable at expiration, but they offer lower returns compared to the riskier OTM options.

Practical Example

Let’s say Bitcoin is trading at $30,000:

ATM Option: A call or put option with a strike price of $30,000.

OTM Call Option: A call option with a strike price of $35,000. The price needs to rise above $35,000 plus the premium paid for the option for it to be profitable.

ITM Call Option: A call option with a strike price of $25,000. It already has intrinsic value because the current price is above the strike price.

Conclusion

The price of crypto options is determined by a combination of intrinsic value, time value, volatility, and other market factors. Understanding whether an option is ATM, OTM, or ITM is crucial for making informed trading decisions. Each type of option offers different risk-reward profiles, and successful traders often use a mix of these options in their strategies to manage risk and maximize potential returns. As the crypto market continues to grow, gaining a deeper understanding of these financial instruments will become increasingly important for traders and investors alike.