In the Money

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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In the Money Meaning

In The Money (ITM) refers to an option that generates a profit if it is exercised. It differs for call and put options. When a call option is in the money, the strike price for the underlying asset is less than the market price. Inversely, a put option is in the money if the strike price of the underlying asset is more than the market price.

In the Money

Besides in the money, the trades can occur at out of the money and at-the-money options as well. An in-the-money option can move to either an at the money (ATM) option or an out of the money (OTM) option due to the change in the price of the underlying assets since it is always dependent on the market conditions.

Table of contents
  • In the money" (ITM) refers to a call option's strike price being below the underlying asset's actual market price or a put option's strike price being higher than the current market price. In this scenario, exercising the vote could lead to a profit if the choice is a call, or if it's a put, the option has intrinsic value.
  • 'Deep in the Money' options with a delta of 0.75 or more can be profitable, but the delta can be positive or negative and represents the price difference between the asset and option.
  • Compared to options with higher strike prices, choosing this option carries less risk.

In the Money Explained

In the money options generate almost guaranteed profit for those who invest in them. The reason behind this is the relationship that the strike price and the current market price of the underlying assets share. There can be a call option as well as a put option available with these financial alternatives.

It is important to understand how these call and put options work to understand and define in the money appropriately. While the former allows option holders to buy assets and securities below the prevailing market price, the latter makes them see the security above the current market value of those securities. Hence, profits are guaranteed.

These options contracts come with both intrinsic and extrinsic value. A call option will have an intrinsic value if the strike price is below the market price. If the strike price is above the market price, a put option will have an intrinsic value. This option results in the profit of the holder of the option. The strike price is fixed, whereas the underlying asset price is based on the market. The price of the underlying asset will always keep on changing according to the market conditions.

In The Money does offer profit-generating opportunities, but they have the tendency to convert into At The Money and Out of the Money contracts amidst the fluctuations happening in the market. When the market price of the underlying asset becomes equal to the strike price, the option becomes an ATM option.

On the contrary, when the ITM options reflect no intrinsic value and exhibit wholly extrinsic value, they get converted into OTM. An OTM call option has a strike price more than the market price of the securities involved, while an OTM put option has a lower strike price compared to the market price of the underlying stocks, assets, or securities.

When in the money becomes out of the money at any stage of the trade, the scenario changes. The premium for OTM is lower than the ITM option.

Examples

Let us consider the following examples to understand the in the money options and how these work:

Example #1 - Call Option

Let us consider that you buy a call option on Apple Inc. at $ 200, which gives you the right but not the obligation to buy the underlying asset. The underlying asset, Apple Inc.'s stock, is currently being traded in the market at $203. So, this option is said to be in the money as you can buy the stocks of Apple Inc. at $3 less than the market price.

This is the opposite for put options.

Example #2 - Put Option

Now, you buy a put option on Apple Inc. at $200, which gives you the right but not the obligation to sell the underlying asset. A put option will be profitable or be in the money if the market value of the shares of Apple Inc. falls below $200. Because you can buy the shares from the market at a much cheaper rate than the rate you have agreed to sell them. If the underlying asset's value falls to $197, you can buy the shares from the market at $197 and exercise the put option at $200, giving you a $3 profit.

Example#3

If we take another example of call option, where the strike price is considered to be $100, then in case the price of the stock goes beyond $100, the trader can still buy it at the same price. This is shown in the chart below, where the price of the stock is assumed to be $110. From the chart it should be noted that the option will continue to remain in loss position till the time the stock price goes beyond the strike price and the premium. Therefore, in this case, the price of the stock should be at least $105 to reach the breakeven. This is clearly shown in the green and grey portion of the diagram. Therefore, from such a diagram, it is possible to determine at which level the trader will start earning profits.

Source

Deep In the Money

An option that would lead to a large profit if exercised is called Deep in the Money. Deep In money options refer to the options that would result in a huge profit if exercised. Such options have an intrinsic value, and exercising them will give a profit to the holder of the option.

This is a new term used by options traders for options with a higher delta, 0.75 and above, to be precise. Delta is the change in the price of an asset (the option) to the corresponding change in the price of its underlying asset. The delta value for an option may be positive or negative depending on the option, whether call or put.

For example, if an option has a delta of 0.75, if the price of the underlying asset increases by $1 per share, everything else being equal, the option's value will increase by $0.75 per share.

Advantages

In the money option is the contract that allows individuals and entities to reap profits. The risk-free returns that they get is one of the most significant resons for them to select these options. Let us have a quick look at the benefits of these options below:

  • In the Money, Option has a higher delta value than at the money option or an Out of the money option, which means that this option would give a higher return than an At the money option or an Out of the money option would give with the same move on the underlying asset or stock.
  • The biggest advantage of having this type of option is that it has a lower risk than an At money option or an Out of money option. This is because the underlying asset would have intrinsic value at the time of expiration even if the value of the underlying stays unchanging, unlike an Out of money option, which would result in a complete loss.
  • The holder of this type of option will always benefit from exercising the option. Since the option has an intrinsic value, it is always worth exercising.

Disadvantages

Though these options come with multiple benefits, they are still not devoid of limitations. These alternatives come with various challenges. Listed below are the disadvantages of these options. Let us have a quick look at them:

  • The money option consists of intrinsic value, and the per-contract value would be more than At money option or an Out of money option. This makes an ITM contract more costly than At money or an Out of the money option.
  • The percentage gain on an ITM option is lesser than what would be gained on the same move for an At money option or an Out of money option. Although there is a profit in such an option, the percentage gain is much higher when an option is At the Money or Out of the money.

In The Money vs Out Of The Money vs At The Money

Options contracts are classified into three categories, depending on the relationship between the strike price and the current market price of the underlying securities in question.

In the money, out of the money, and at the money are those terms and options that the financial market participants come across. Hence, it is important for them to understand the basic difference between the three of them and be prepared for all transformations that might happen amidst the market fluctuation even though they invest in the ITM alone.

Let us have a look at the difference:

  • An option may be ‘At the money,’ which means the strike price equals the market price. The holder of this option is at a break-even level, meaning they would make no profit or loss if the option is exercised.
  • An option may also be ‘Out of the money,’ meaning that the holder of the option would incur a loss if exercised.
  • On the contrary, In The Money is the option that ensures holders of profits if exercised.

In a nutshell, an option may be ITM, OTM, and ATM depending on the relationship between the underlying asset’s current market price and the option’s strike price.

Frequently Asked Questions (FAQs)

Do in-the-money options automatically exercise?

Stock options still in the black will be automatically exercised when they expire.

Do in-the-money options expire worthless?

The total premium sum paid will be forfeited. Only one side of the transaction, the purchase of the options, will incur a brokerage fee, not the other when the options expire worthless on the expiration date.

Are in-the-money options safer?

Options that are in the money are more expensive, but they are also safer. Options that are out-of-the-money have a higher chance of expiring worthless and need a more remarkable price change to become lucrative.

Can I exercise an in-the-money option before expiration?

You can exercise an in-the-money option before its expiration date. Exercising the option means using your right to buy or sell the underlying asset at the specified strike price. However, it would help if you considered factors such as transaction costs, taxes, and whether exercising early or letting the option expire is more advantageous.