What In the Money Means
In the money is an option with intrinsic value that you can currently cash in at a profit. Let me explain: In the money (ITM) refers to an option that's profitable—not counting trading costs—or has intrinsic value. If it's an ITM call option, you as the holder can buy the security at a price below the market price. For an ITM put option, you can sell for more than the market price. Options can also be at the money (ATM) and out of the money (OTM).
Key Takeaways
- A call option is in the money (ITM) if the market price is above the strike price.
- A put option is ITM if the market price is below the strike price.
- An option can also be out of the money (OTM) or at the money (ATM).
- ITM options contracts have higher premiums than other options that are not ITM.
- You should account for the cost of buying options when calculating the potential profit from an ITM option.
Understanding Moneyness in Options
Moneyness describes the relationship between the current price of the asset you have the right to buy or sell and the strike price, which is the price at which you can exercise the option. There are three categories of moneyness: ITM, where you could profit by exercising it immediately because the strike price is favorable compared with the market price; OTM, the opposite, where the strike price isn’t favorable and you'd lose money exercising now; and ATM, where strike prices are equal to or very near the current price, so you wouldn’t make money exercising right away.
Moneyness matters because it helps determine an option contract’s price, known as the premium—this is the option’s intrinsic value, or what you'd gain if exercised immediately. The other factor in an option’s price is its extrinsic value, which mainly includes implied volatility and time until expiration. Less volatility or time means a smaller chance for the asset price to move favorably, and vice versa.
In-the-Money (ITM) Options
An option is ITM if the strike price is favorable compared with the current market price of the underlying asset. For a buy option, the market price is higher than the strike; for a sell option, it's lower. In both cases, it's profitable. The ITM option's intrinsic value is the difference between the strike and market price, or how much it's ITM.
For instance, if you have an option to buy Apple Inc. (AAPL) at $200 and shares are at $223, it's ITM with $23 intrinsic value. You'll notice ITM contracts cost more than ATM or OTM ones because they can be sold favorably and are theoretically profitable right away. But remember, an ITM option isn’t necessarily profitable to sell immediately—you need to account for trading expenses.
In-the-Money Call Options
Call options let you buy the underlying asset at a specific price before a set date. The premium depends on whether it's ITM or not. If you buy call options, you typically believe the asset's price will rise above the strike by expiration—you're bullish on it.
A call is ITM if the stock's market price is higher than the strike. The intrinsic value is that difference. Say a call has a $25 strike and the stock is at $30—it's ITM, and you'd pay the premium based on that spread. If holding an expiring ITM call, you can exercise for the difference, but profitability depends on your total costs.
In-the-Money Put Options
A put option gives you the right to sell the underlying security at the strike price before expiration. If you buy puts, you think the asset's price will drop below the strike by expiration—you're bearish.
An ITM put means the strike is above the market price. If it's ITM at expiry, it might be worth exercising. You're hoping the price falls enough below the strike to cover the premium and more.
Examples of ITM Options
Take a call ITM option: Suppose you hold a call on Bank of America (BAC) with a $30 strike, and shares are at $33—it's ITM. You can buy at $30 and sell at $33 for $3 per share gain, or $300 for 100 shares. But if you paid $3.50 premium ($350), you'd lose $50 overall. Even ITM, it might not profit. If the price drops to $29, it's now $1 OTM. Prices fluctuate, so ITM can shift to ATM or OTM before expiration.
For a put ITM option: You own a put to sell Tesla (TSLA) at $249, paid $2.80 premium ($280), and shares are at $247. It's ITM with $2 intrinsic value ($200 for 100 shares), but that doesn't cover the premium. The price needs to drop to at least $246 for profit—the further it falls, the better.
The Bottom Line
ITM options have intrinsic value because their strike prices allow profitable exercise—for calls, strike below market so you buy low; for puts, strike above so you sell high. They have more intrinsic value and less time decay than ATM or OTM, but you must consider the premium and commissions. Just being ITM doesn't guarantee profit if costs exceed the value.
Other articles for you
Variable overhead spending variance is the difference between actual and budgeted variable overhead costs based on production activity levels.
A probability density function (PDF) describes the likelihood of outcomes in a continuous range, commonly used in finance to assess investment risks and returns.
Stare decisis is a legal doctrine that requires courts to follow precedents from previous similar cases to ensure consistency in rulings.
A carve-out is a business strategy where a parent company sells a minority stake in a subsidiary via an IPO, creating a standalone entity while retaining control and gaining cash.
The Loan Life Coverage Ratio (LLCR) evaluates a company's long-term ability to repay loans by comparing discounted cash flows to outstanding debt.
A Samurai bond is a yen-denominated bond issued in Japan by non-Japanese entities under Japanese regulations to access local capital.
Golden handcuffs are financial incentives designed to keep key employees from leaving a company.
The New Deal was Franklin Roosevelt's series of programs to combat the Great Depression by boosting the economy and providing social support.
Economic value represents the subjective benefit a person derives from a good or service, distinct from its market price.
Key ratios provide a snapshot of a company's financial health by comparing financial statement items to assess aspects like liquidity, efficiency, and profitability.