In-the-Money (ITM) / Out-of-the-Money (OTM)

In-the-Money (ITM) / Out-of-the-Money (OTM) in crypto refers to the status of an options contract in relation to the current market price of the underlying cryptocurrency asset.

1. In-the-Money (ITM):

- Definition: An options contract is considered in-the-money when the current market price of the underlying asset is favorable for the holder of the option to exercise it profitably.

- Example: If the strike price of a call option is $5000 and the current market price of Bitcoin is $6000, the call option is in-the-money because the holder can buy Bitcoin at $5000 (the strike price) and immediately sell it at the market price of $6000, generating a profit.

- Case: A put option with a strike price of $7000 when the market price of Ethereum is $6000 would be considered in-the-money, as the holder can sell Ethereum at $7000 through the option, whereas the market price is lower.

2. Out-of-the-Money (OTM):

- Definition: An options contract is out-of-the-money when the current market price of the underlying asset is not favorable for the holder to exercise the option profitably.

- Example: If the strike price of a call option is $7000 and the current market price of Bitcoin is $6000, the call option is out-of-the-money because there would be no benefit to exercising it, as the holder could buy Bitcoin cheaper on the open market.

- Case: A put option with a strike price of $4000 when the market price of Litecoin is $5000 would be considered out-of-the-money, as the holder could sell Litecoin at a higher price in the open market rather than exercising the option to sell at $4000.

Understanding whether an option is in-the-money or out-of-the-money is crucial for traders to make informed decisions about exercising their options or letting them expire worthless.