In the money options, strike prices (ITM) are strikes that trade above or below the stock’s current price. These strikes are the most expensive because they trade below the stock price on the call side. They trade above the price of the stock on the put side. The deeper in the money you spend, the more expensive the options contract will be because you have a better chance of making a winning trade. Add the Probability of ITM to your brokerage platform to see your probability of success on the trade.
In the money refers to the strike price of an options contract and where the price is about the market. ITM is when a call’s strike price is lower than the market price. An in-the-money put means the strike price is above the market price.
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In the money is one of the three “money” components of options trading. ITM options contracts are seen differently depending on whether they’re calls or puts.
Any in-the-money options contracts, whether bullish or bearish, mean that there’s intrinsic value.
Strike prices have intrinsic and extrinsic value. Three types of moneyness options contracts are ITM, ATM, and out of the money. Out of the money, contracts have no intrinsic value.
It’s another part of options trading where profit and loss are affected. Hence, the strike price is one of, if not the most important, part of picking a contract to buy.
Being ITM doesn’t mean you’ll make a profit, but it does give you many chances. The contract has intrinsic value; therefore, it’s worth exercising.
For example, you purchase a call at $10. The stock is currently trading at $14. That call option is considered to be ITM. In essence, you could sell it for a gain of $4.
Each option contract controls 100 shares. So you’d multiply 4 x 100, which comes to $400. Another great thing about option contracts is that they’re not as expensive as buying shares outright.
How ITM Options Work
In the money, options contracts for calls are lower than the market price. This makes them more expensive to buy. That’s not necessarily a bad thing, as it’s still cheaper than buying 100 shares of a stock.
ITM options and contracts tend to be the safer bet if buying naked calls and puts. Hence, they cost more than at or out of the money. Options contracts do expire. The time value is also known as the extrinsic value.
This also affects the profit and loss of a contract. An ITM options contract with a short expiration date will be cheaper than one 1-2 months out—however, the more time value there is, the higher the chance of making a profit.
A put option that’s ITM has a strike higher than the market price. Put options are the bearish option and the equivalent of short selling. You can both buy and sell put options.
In the Money Options Example
This is an example of an options chain for $SPY in the ThinkorSwim platform. The highlighted areas on the chart are the in the money strike prices. It’s the gray-shaded area on the options chain. The black areas are the OTM strike prices. There are also options charts to look at.
The chain is fully customizable and allows traders to add Option Greeks, delta, theta, gamma, vega, open interest, implied volatility, and intrinsic and extrinsic value.
In the Money Calls and Puts
An “in-the-money” option is an option contract with intrinsic value because it is profitable.
A call option is “in the money” when the underlying stock’s current market price is above the option’s strike price. In contrast, a put option is “in the money” when the underlying stock’s market price is below the option’s strike price.
Here are some examples to illustrate the concept of ITM options:
Call Option: Assuming that the current market price of stock ABC is $60, you buy a call option with a strike price of $50.In this scenario, your call option is “in the money” because the underlying stock’s market price is trading above the option’s strike price ($60 > $50). The difference between the strike price and the current market price determines the intrinsic value of a call option. ($60 – $50 = $10).
Put Option: Suppose you buy a put option with a strike price of $40 on stock XYZ, currently trading at $35. In this case, your put option is “in the money” because the underlying stock’s market price is trading below the option’s strike price ($35 < $40). The put option holds an intrinsic value equal to the difference between the strike price and the current market price ($40 – $35 = $5).
In summary, an ITM option is a profitable contract with intrinsic value. For a call option, this is when the underlying stock’s current market price is trading above the option’s strike price. However, for a put option, it happens when the underlying stock’s market price is trading below the option’s strike price.
Out of the Money Options
An option can be categorized as out of the money (OTM) or at the money (ATM). An “out of the money” option contract refers to an option contract that does not hold intrinsic value and is not profitable. When an option is out of the money, the underlying stock’s current market price makes exercising the option unfavorable.
For a call option, it is “out of the money” when the underlying stock’s current market price is below the option’s strike price. Similarly, a put option is “out of the money” when the underlying stock’s market price is above the option’s strike price.
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ITM vs. OTM Options Comparison
In The Money
- Has Intrinsic value
- Likely to be exercised
- Higher Premiums
- Less likely to lose value
Out Of The Money
- No intrinsic value
- Unlikely to be exercised
- Lower premiums
- Less likely to gain value and more likely to expire worthless
Key Takeaways
- We refer to an option with intrinsic value as “In the money” (ITM)
- The option has a value as the strike price is favorable when compared with the current market price of the underlying asset.
- If an option has a positive intrinsic value, it is considered in the money. Conversely, if its intrinsic value is negative, it is said to be out of the money.
- Options contracts that are in-the-money have a higher premium than options that are not ITM.
Final Thoughts: In the Money
Options are the most popular contracts to trade in the money. They can give you a cushion, but you need the time to ensure it’s the right trade. Options have many moving parts. Make sure to take the time to study how options work and practice trading them. Once you’ve mastered them, they’re a great strategy to use.
If you need more help, take our options trading course.
Frequently Asked Questions
Options in the money (ITM) refers to the intrinsic value portion of an options contract.
An "in the money" option is an options contract that holds intrinsic value. In other words, an in-the-money option is an option with intrinsic value because it is currently profitable.
In the money call and put option contracts are always profitable to an options buyer due to its intrinsic value.
Here's an example of In the Money:
- XYX company is trading at $150 per share
- The call option of $145 would be in the money
OTM stands for "Out of the Money," while ITM stands for "In The Money."
