NSE offers several strikes on each of the underlying on which options are traded. The strike interval rule is based on the guidelines given by SEBI. We have frequently discussed in this column that the at-the-money (ATM) option on an underlying should be the most optimal choice for a long position. Why do traders prefer other strikes? This week, we explore the reasons why in-the-money (ITM) and out-of-the-money (OTM) strikes are also traded. 

Strike preferences

Suppose all option traders go long on the ATM strike. Even in such a scenario, you will have multiple strikes available on any trading day on the NSE. Why? If the Nifty Index trades at 23,790, the 23,800 call will be the ATM strike. Note that the ATM strike is one just above the current price of the underlying price. This definition fits with the Black-Scholes-Merton model that defines an ATM option as the strike which is equal to the forward price of the underlying at expiry. Now, suppose you initiate a long position on this strike. You will initiate the position only if you believe that the Nifty Index is likely to climb up.

Suppose the Nifty Index moves to, say, 23,930. Two observations are worth noting. One, the 23,800 strike will be now in-the-money (ITM), with 130 points of intrinsic value. And two, traders who want to buy the ATM strike with the Nifty Index at 23,930 will have to buy the 23,950 strike. So, even in a world where all traders buy only ATM strikes, NSE will have to introduce newer strikes to meet the demand as the underlying moves up.

But traders do not always trade the ATM strike, even though this strike is sympathetic to option Greeks; previously in this column, we showed that the ATM strike is the most sensitive to change in time (highest theta), change in volatility (highest vega) and change in delta (highest gamma). Why are ITM and OTM strikes traded when traders are aware that the ATM strike is rich in Greeks? The immediate ITM strikes carry lower time value than the ATM strike. That translates into lower time decay or theta. So, some traders may prefer these strikes. Note that the flip side is that these strikes lose more because of the decline in option delta when the underlying falls. What about OTM strikes? Many novice traders prefer such strikes because the absolute premium is low. Unfortunately, these strikes do not offer optimal reward-risk potential. 

Optional reading

You should not be overwhelmed by the choice of strikes available on the NSE. Whether you want to go long or short, the ATM option is typically optimal because of the Greek sensitivities. But as the underlying climbs up and the ATM strike becomes ITM, the strike will gradually give up its intensity relating to the Greeks. It is a similar argument when the underlying moves in the opposite direction and the ATM strike becomes OTM. 

(The author offers training programs for individuals to manage their personal investments)

Published on May 30, 2026