Understanding Binary Basics: Difference Between ITM, OTM and ATM

Understanding Binary Basics: Difference Between ITM, OTM and ATM

When trading binary options, you see or hear ITM, OTM and ATM regularly, but what do they mean? The short answer is ITM means in the money, OTM indicates out of the money, and ATM stands for at the money. This article will further define what they spell out to traders.

Understanding Binary Basics Difference Between ITM, OTM and ATM
Understanding Binary Basics Difference Between ITM, OTM and ATM Getty Images

At the money (ATM) pertains to the strike price closest to where the market is trading at the time. Look at the indicative price on a Nadex price ladder and then find the binary priced closest to 50, this is the At The Money (ATM) binary. The expiration time has little effect on at the money. At expiration, the binary either is profitable or not. It is worth 100 or 0. When you think about it, 50 is right in the middle, which makes sense that at the money would be priced at about 50. This is very important to understand.

Look at the image below. You can see the indicative price is 18550. The strike with the binaries priced closest to 50 is 18550. Bid price is 49.50. Offer price is 54.75.

 Difference Between ITM, OTM and ATM

ATM binaries have a 50/50 chance of profiting at the current time. In the example above, the market might or might not be at 18550 at expiration.

Out of the money (OTM) are the strikes beyond the current market. If long, then higher than the market and if short, then lower than the market. If you buy a binary with a strike that is way above the market, you are saying that the market has to move all the way up to and one pip or tick beyond (greater than), that strike point for that strike to expire profitably. OTM binary options have no intrinsic value, only extrinsic or time value.

In the money (ITM) are the strikes priced higher because the statement is already true. If you buy an ITM binary, you have three ways to profit. The market can keep going up, stay flat or even move down, as long as it remains above your strike price. An ITM binary has a much higher probability of profiting due to the market already being beyond the strike. When buying a binary, the amount of profit you make is the difference between where you bought and $100. For example, if you bought at $75, you would make $25 at expiration, since 100 – 75 = 25.

Knowing that at the money is about 50, this splits all the strike offerings in half when you look at the price ladder.

All strikes below 50 are below current market. If you buy a strike below this point, you are saying the market will expire above that strike price and the statement is already true.

Knowing more about in the money, out of the money and at the money in relation to the current market and strike prices will make trading binary options easier and hopefully, more profitable.

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.