Believe it or not, this is probably the most emailed question I receive in my inbox about option trading. When you look up options for most underlying securities you're usually presented with a long list of, you guessed it, options. It really all depends on your trading strategy and how quickly you expect the underlying asset to increase in value - so keep in mind the time frame.

An out-of-money option is cheaper for a reason; there's a greater chance that the option will become worthless upon expiration. But it also yields higher returns when the underlying security does trade in your favor, the option may jump from $0.10 to $0.20 in a day, that a 100% increase! For those who are more cautious, want to reduce risk and don't expect a whole lot of volatility, I recommend to use in-the-money options, the returns aren't that high and it's more expensive to buy, but there's less risk involved (remember, your in-the-money option already has intrinsic value from the moment you buy it.

In order to fully understand the basics of ITM, OTM or ATM options it's best to look at a chart that gives a visual presentation how ultimately an option trades, like the chart below.

Options trading example nifty
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