ITM, ATM, OTM: Some Basic Trading Terminology (Part Of A Series)

It’s always good to have multiple trading strategies that you can use no matter what the market presents during the trading day.

You need strategies that you can use if the market is wild or choppy, and strategies that are proven to work in a flat market.

In order to know which strategy is right for which market condition, there are a few things you have to understand before you can implement these strategies into your trading.

ATM, ITM or OTM

If the first one of those acronyms makes you think of your bank, then you need to pay close attention to the following information. It is important for you to be able to wrap your head around this, in order to add these strategies to your playbook.

ATM stands for At The Money or At The Market. It means that the underlying security is trading close to the strike price of the binary, making the binary At The Money or At The Market.This is where the market is trading at right now.

Since a binary option is worth either $0 or $100 at expiration, an ATM binary would be worth approximately $50. Probability is another way to look at this number. An ATM binary has a 50/50 shot of expiring at either $0 or $100, so you have a 50 percent chance of the market going either way.

For an ATM strike to be profitable, it has to move in your direction, i.e. whether you bought or sold the contract, and be true by at least one tick at expiration.

To view larger image, click HERE.

ITM means In The Money and that the actual binary statement is already true. This means that the market is already above your bought binary strike price or below your sold binary strike price.

The binary is close to being worth $100 if you bought the binary and close to being worth $0 if you sold the binary. An ITM binary does not require any movement to expire profitable. The market can stay flat, move in the direction of your trade or even move against you a little as long as it does not hit your strike price and you will still be profitable.

The following image shows a Nadex order ticket of a strike that is ITM.

To view larger image, click HERE.

By looking at this ticket, you will notice that the strike price is 1.5364. The Nadex Indicative Index price is 1.536925 showing that the market is more than five ticks above the strike price.

The offer price is 71.25 meaning that there is a relatively high probability, 71.25% chance, that if the market does not move for the next 38 minutes and 31 seconds, this contract will be worth $100 at expiration. It is always good to remember that contracts do not have to be held until expiration at Nadex. You can enter and exit at any time.

OTM is Out of The Money. This is for the binary strike prices that are beyond the current market price. In order for your trade to become profitable when trading an OTM, there has to be some movement.

Depending on how far away the strike price is from the current market price, you may require a miracle or a big news event for the market to move beyond the strike price.

To view larger image, click HERE

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By looking at the image above, you can see the indicative indicates the market is at 0.7886. The strike price is .7893, therefore the market would have to move at least seven ticks to be profitable. If you have a reason to believe the market will move that much in the next 28 minutes, then you could buy it.

When trading with Nadex, you can also get in the trade, watch it as it moves to be profitable, possibly up to $40 and then exit the trade. You do not have to hold it until expiration.

One Of The Biggest Mistakes New Traders Make

New traders will see a cheap OTM contract and without any strategy, reference to a chart or money management skill, buy it and hope for the big payout. For example, they may open a ticket with the buy price of $8 and see the reward listed of $92.

That sounds pretty good! All they see is the risk/reward. There is no plan or reason. Don’t ever enter a contract “just because.” Remember how it is a probability of a reward? In this case, it would be an 8% probability!

Not very good odds when you look at it that way. You have to have a reason for doing the trade.

I Just Want To Trade And Make Money! Why Do I Have To Know ATM, ITM And OTM?

Not all strategies are applicable to all markets. If you have tried trading binary options with most other brokers besides Nadex, you may have discovered that they only offer ITM binary options.

Nadex is the only U.S. regulated exchange to offer ATM and OTM binaries as well as ITM binary options.

Knowing the difference between where the strike prices are in relation to the underlying market price, can help you know which strategy to pull out of your playbook. You wouldn’t play a whole round of golf using only one club.

If you were watching a football game where the quarterback called the same play repeatedly no matter what, you would wonder what was wrong with him. Just like this, your trading benefits from having multiple strategies that you can use as the market changes from day to day.

As you learn the two strategies in this chapter, you will see the importance of being able to purchase all the types of binary options: ATM, ITM and OTM.

To further your trading education, visit www.apexinvesting.com.