Derivatives moneyness in the money out of the money intrinsic value physical settlement

Moneyness: in-the-money, at-the-money, out-of-the-money

From WebNotes, a public knowledge base. Last updated 21 June 2026. Reading time ~13 min.

Key facts

What it classifies	Whether an option has intrinsic value, by where the underlying sits relative to the strike: in-the-money, at-the-money or out-of-the-money
In-the-money call	Underlying above the strike; the call has intrinsic value equal to underlying minus strike
In-the-money put	Underlying below the strike; the put has intrinsic value equal to strike minus underlying
At-the-money	Underlying at or nearest the strike; the premium is almost all time value, with delta near 0.5
Out-of-the-money	No intrinsic value; the premium is entirely time value and expires worthless if the underlying does not cross the strike
ITM stock-option trap	All single-stock F&O is compulsorily physically settled, so an ITM stock option left to expiry triggers delivery of the full underlying value, not a small cash difference

Moneyness is the classification of an option by where the price of the underlying sits relative to the strike, which determines whether the option carries intrinsic value. An option is in-the-money (ITM) when exercising it would yield a positive payoff, at-the-money (ATM) when the underlying is at or nearest the strike, and out-of-the-money (OTM) when exercising would yield nothing. Moneyness sets the split between intrinsic and time value in the premium, maps directly to delta , and, for single-stock options on Indian exchanges, decides whether a contract left to expiry triggers compulsory physical delivery.

A Nifty 24000 call is in-the-money when the Nifty 50 trades at 24200, because exercising it captures 200 points; the same call is out-of-the-money at 23800, where exercising captures nothing. That distinction governs how the premium is built, how the option moves, and what happens at expiry. This article defines the three states for calls and puts, separates the intrinsic value that moneyness creates from the time value that decays, shows how moneyness maps to delta and premium across the chain, and sets out the physical-settlement and securities-transaction-tax considerations that make an in-the-money stock option at expiry a different animal from an index option. For the strike-choice decisions that flow from moneyness, see strike selection on the option chain ; for the settlement mechanics, see physical settlement of stock F&O .

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this article does not carry it and earns no referral commission from the concepts described here.

The three states for calls and puts

Moneyness is defined by comparing the underlying price (S) with the strike price (K). For a call, exercising is worthwhile when the underlying is above the strike; for a put, when the underlying is below it. The classification is symmetric between the two.

State	Call (S vs K)	Put (S vs K)	Intrinsic value
In-the-money	S greater than K	S less than K	Positive
At-the-money	S equal to K	S equal to K	Zero (or negligible)
Out-of-the-money	S less than K	S greater than K	Zero

A call with strike 24000 is in-the-money when the underlying is 24200, at-the-money when it is 24000, and out-of-the-money when it is 23800. A put with strike 24000 reverses this: in-the-money at 23800, out-of-the-money at 24200. In practice the at-the-money strike is the listed strike nearest the current underlying, since the underlying rarely sits exactly on a strike. Some traders also use “near-the-money” for strikes a step or two either side of at-the-money, and “deep in-the-money” or “deep out-of-the-money” for strikes far from the underlying, where delta approaches 1 or 0 respectively. The Varsity moneyness material sets out the same call-and-put framing as the basis for reading the option chain.

Intrinsic value and time value by moneyness

An option premium splits into two parts, and moneyness governs the split. Intrinsic value is the amount by which the option is in-the-money: underlying minus strike for a call, strike minus underlying for a put, floored at zero so it is never negative. Time value, also called extrinsic value, is whatever the premium holds above intrinsic value; it pays for the chance that the option moves further into the money before expiry, and it is the part that theta erodes and vega moves.

The two parts vary in opposite ways across moneyness. An out-of-the-money option has zero intrinsic value, so its entire premium is time value; if the underlying never crosses the strike, that time value decays to nothing and the option expires worthless. An at-the-money option also has roughly zero intrinsic value, and it carries the most time value of any strike, because the outcome is most uncertain there. A deep in-the-money option is almost all intrinsic value, with little time value left, because there is little doubt it will finish in-the-money; its premium tracks the underlying nearly rupee for rupee. This is why moneyness maps so cleanly onto the Greeks: at-the-money options, holding the most time value, carry the largest gamma , theta and vega , while deep in-the-money options, holding the least, carry the least of each. For how the premium is assembled, see option premium .

Moneyness	Intrinsic value	Time value	Premium behaviour
Deep in-the-money	Large	Small	Tracks the underlying nearly one-for-one
At-the-money	Near zero	Largest	Most sensitive to time and volatility
Out-of-the-money	Zero	All of it	Expires worthless unless the underlying crosses the strike

How moneyness maps to delta and premium

Moneyness and delta move together, which is what makes delta a shorthand for moneyness. A deep in-the-money call has delta approaching +1, behaving like long futures; an at-the-money call sits near +0.5; a deep out-of-the-money call has delta near 0. Puts mirror this from 0 to -1. Because the absolute value of delta also approximates the risk-neutral probability that the option expires in-the-money, moneyness, delta and that probability all line up: an out-of-the-money option has low delta and a low chance of finishing in-the-money, an at-the-money option has delta near 0.5 and roughly even odds, and a deep in-the-money option has high delta and a high chance.

This mapping is the practical bridge from moneyness to the premium. Out-of-the-money options are cheap because they are pure time value with a low probability of paying off; in-the-money options are expensive because they carry intrinsic value plus the near-certainty of finishing in-the-money. A trader choosing a strike is implicitly choosing a delta, a probability and a cost at the same time, which is the subject of strike selection on the option chain . The Kite option chain shows the moneyness visually, usually shading the in-the-money strikes, and lists delta in the Greeks tab; see how to use the options chain on Kite and how to read option Greeks on Kite .

Moneyness at expiry: the physical-settlement trap

Moneyness is most consequential at expiry, because it decides whether a single-stock option settles into a delivery obligation. All single-stock F&O on Indian exchanges is compulsorily physically settled, a regime the exchanges phased in from October 2019. An in-the-money stock option held to expiry is exercised by the exchange, and settlement happens in the underlying shares at the strike price, not as a small cash difference. So an out-of-the-money stock option expires worthless with no obligation, while an in-the-money stock option delivers the full underlying value: the call holder must take delivery and pay for the shares at the strike, the put holder must give delivery of the shares. This is set out in Zerodha’s physical-settlement policy and in the NSE and BSE settlement framework.

The danger is that a trader holding a deep out-of-the-money option for a few thousand rupees of premium can, if the underlying moves through the strike near expiry, end up obliged to take or give delivery of stock worth lakhs. Index options and index futures, such as on the Nifty 50 and Bank Nifty , are cash-settled and carry no such obligation, so the trap is specific to single-stock contracts. To manage it, the exchanges levy escalating delivery margins on in-the-money stock contracts through the expiry week, typically starting around four trading days before expiry and rising as expiry nears, so a writer or holder who has not closed an in-the-money stock position faces a climbing margin call. See physical settlement of stock F&O , how to physically settle an ITM option and how to avoid physical settlement of options .

The STT consideration on exercised ITM options

Moneyness at expiry also drives the securities-transaction-tax (STT) treatment, which once produced a notorious trap. STT is levied on the exercise of an in-the-money option, and historically it was charged on the full settlement value of the exercised contract rather than on the premium, so a holder with a few thousand rupees of intrinsic value could face an STT bill out of proportion to the gain. From August 2019, SEBI and the exchanges narrowed the STT on exercised options to the intrinsic value rather than the full contract value, which removed the worst of that trap; the Union Budget of that year carried the change. The physically delivered leg that follows exercise is then treated as a delivery trade and attracts STT at the delivery rate, as Zerodha’s settlement documentation describes. Rates and the exact base have changed over time, including the broader options-STT revisions that took effect from 1 October 2024, so confirm the current rate and base in the broker’s charges schedule before relying on a figure; see the October 2024 STT hike on F&O , options exercise charges on Zerodha and Zerodha F&O charges .

To soften the delivery shock, the exchanges define a close-to-money (CTM) band, the few in-the-money strikes immediately around the final settlement price, and provide a do-not-exercise treatment for contracts in that band; Zerodha applies it where a client’s cash balance is short against the intrinsic value of a CTM contract. Outside that narrow band, an in-the-money stock option is exercised and settled in delivery. The reliable defence remains operational: square off an in-the-money stock option before the close on expiry day if you do not intend to take or give delivery. See stock-option restrictions near expiry and expiry-day options trading .

Moneyness shifts as the underlying moves

Moneyness is a snapshot, not a fixed label. The same contract moves between out-of-the-money, at-the-money and in-the-money as the underlying travels, and that drift is what makes moneyness a live risk rather than a static description. A call bought out-of-the-money becomes at-the-money as the underlying rises to the strike, then in-the-money beyond it, and its premium composition shifts from pure time value to a growing slice of intrinsic value at each step. A trader who selected a strike for its moneyness at entry must track where it sits now, because the delta , the decay profile and, for stock options, the expiry-day delivery risk all change with it.

The drift matters most near expiry, where gamma is largest and a small move can flip a strike across the money. An out-of-the-money stock option that looked safe to let lapse can become in-the-money in the final hour and trigger physical delivery, while an in-the-money option can fall out of the money and expire worthless, wiping the intrinsic value the holder was counting on. This is why moneyness near expiry is monitored tick by tick rather than assumed from the morning’s position, and why the reliable defence on a single-stock position is to close it before the expiry-day close unless delivery is intended. For the strike-choice decisions that flow from where a contract sits on the chain, see strike selection on the option chain ; for the index-level volatility that drives how far moneyness can shift, see India VIX and implied volatility .

External references

References

Zerodha Varsity, Option Theory for Professional Trading, moneyness chapter (as of June 2026).
NSE and BSE settlement framework for compulsory physical settlement of single-stock derivatives, in force from the October 2019 phase-in.
Zerodha support, policy on physical settlement of equity derivatives, including the close-to-money do-not-exercise treatment (as of June 2026).
Union Budget 2019-20 and related notifications narrowing STT on exercised options to intrinsic value.
SEBI, Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment, January 2023 and the September 2024 update.

Frequently asked questions

What do ITM, ATM and OTM mean in options?

They describe moneyness. In-the-money (ITM) means the option has intrinsic value: a call with the underlying above the strike, or a put with it below. At-the-money (ATM) means the underlying is at the strike. Out-of-the-money (OTM) means no intrinsic value, so the premium is all time value.

What is the difference between intrinsic and time value?

Intrinsic value is the amount an option is in-the-money: underlying minus strike for a call, strike minus underlying for a put, never below zero. Time value is everything in the premium above intrinsic value, paying for the chance of further movement. OTM and ATM options are pure time value.

How does moneyness map to delta?

Deep in-the-money options have delta near 1 for calls or -1 for puts and behave like the underlying. At-the-money options sit near 0.5 or -0.5. Out-of-the-money options have small delta. Delta also reads as the rough probability the option expires in-the-money, so moneyness and that probability move together.

Why is letting an ITM stock option expire risky?

All single-stock F&O in India is compulsorily physically settled. An in-the-money stock option left to expiry is exercised and delivers the full underlying shares at the strike, so you must take or give delivery worth the whole contract value, not settle a small cash difference. This needs full funds or stock.

Are index options physically settled too?

No. Index options and index futures, such as on the Nifty 50 and Bank Nifty, are cash-settled: only the difference is paid or received. Compulsory physical settlement applies to single-stock options and single-stock futures, which is why the ITM expiry trap is a stock-option problem.

How do I avoid the ITM physical-settlement trap?

Square off an in-the-money stock option before the close on expiry day if you do not intend to take or give delivery. Margins for delivery ramp up in the expiry week on ITM stock contracts. Zerodha applies a do-not-exercise facility only to a narrow band of close-to-money strikes.

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Last reviewed: 21 June 2026
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