In the Money

What Does “In the Money” (ITM) Mean?

In the world of options trading, “In the Money” (ITM) refers to a situation where an option has intrinsic value, and exercising it would result in a profit for the holder. Specifically, for a call option, it’s considered ITM when the underlying asset’s market price is above the option’s strike price. Conversely, for a put option, it is ITM when the market price is below the option’s strike price.

Examples of “In the Money” Options:

1. Call Option Example:

   • Strike Price: $50
   • Current Market Price: $60
   • The call option is ITM because exercising the option allows the holder to buy the asset at $50 and immediately sell it for $60, resulting in a gain of $10 per share.

2. Put Option Example:

   • Strike Price: $70
   • Current Market Price: $60
   • The put option is ITM because exercising the option allows the holder to sell the asset at $70 when the market price is only $60, resulting in a gain of $10 per share.

Frequently Asked Questions (FAQ)

What is the opposite of “In the Money”?

The opposite of “In the Money” is “Out of the Money” (OTM), which refers to an option that would not result in a profit if exercised immediately. This means the strike price is not favorable compared to the current market price.

What does “At the Money” mean?

“At the Money” (ATM) describes an option whose strike price is exactly equal to the current market price of the underlying asset. It would neither result in a gain nor a loss if exercised immediately.

How does “In the Money” affect an option’s premium?

An option that is ITM tends to have a higher premium because it already holds intrinsic value, making it more valuable to buyers.

Can an option be partially “In the Money”?

Yes, an option can be partially ITM if the difference between the strike price and the market price is small. However, the specifics depend on the time value remaining until expiration and the volatility of the underlying asset.

How does expiration date affect an ITM option?

As an option’s expiration date approaches, the time value decreases, making the intrinsic value more significant. If the option remains ITM close to expiration, it is more likely to be exercised.

Related Terms with Definitions

1. Call Option: A financial contract giving the option buyer the right, but not the obligation, to buy an asset at a specified price within a specific time period.
2. Put Option: A financial contract giving the option buyer the right, but not the obligation, to sell an asset at a specified price within a specific time period.
3. Strike Price: The pre-determined price at which the holder of an option can buy (call) or sell (put) the underlying asset.
4. Premium: The price paid by the buyer to the seller to acquire the option.
5. Intrinsic Value: The amount by which an option is ITM; calculated as the difference between the current market price and the strike price.
6. Extrinsic Value: The portion of an option’s premium that exceeds its intrinsic value, also known as the time value.
7. Time Value: The additional amount that traders are willing to pay for an option above its intrinsic value, based on the time left until expiration.
8. Exercise: The act of invoking the right to buy (call) or sell (put) the underlying asset as specified by the option contract.
9. Expiration Date: The last date on which the option can be exercised.
10. Out of the Money (OTM): Refers to an option that would not be profitable if exercised at the current market price.

Online References

• Investopedia on Options
• Chicago Board Options Exchange
• NYSE Euronext Options

Suggested Books for Further Studies

1. “Options, Futures, and Other Derivatives” by John C. Hull

   • A comprehensive guide on derivatives markets, including detailed explanations of options.

2. “Options as a Strategic Investment” by Lawrence G. McMillan

   • This book covers various options strategies and how to employ them effectively.

3. “The Options Playbook” by Brian Overby

   • Suitable for beginners and intermediates, providing clear information and strategies for options trading.

4. “Option Volatility and Pricing” by Sheldon Natenberg

   • Essential reading on option pricing and volatility strategies.

5. “Trading Options Greeks” by Dan Passarelli

   • A book that delves into the intricacies of option pricing models and Greek calculations.

Accounting Basics: “In the Money” Fundamentals Quiz

Thank you for learning about “In the Money” options with us! Keep enhancing your knowledge for optimized financial decision-making.