DEFINITION of In the money (ITM)
In the money (ITM) means that some option contract has intrinsic value.
WHAT IT IS IN ESSENCE
For example, a Call option is in the money if the price of the underlying asset is higher than the option contract strike price.
Conversely, a Put option is in the money if the price of the underlying security is lower than the option contract strike price. Just to remind you, call options are a bet that the underlying asset will rise in price.
While a put option is a wager that the underlying asset price will fall.
For example, if the strike price of the call option is $13, and the price of the stock is sitting at $18, the option is considered to be in the money.
This is because the option gives the trader the right to buy the stock for $13. But he could immediately sell the stock for $18, and gain is $5. And we know that each options contract represents 100 shares, so the profit is $5 x 100 = $500.
In the money (ITM) means that a call option’s strike price is below the market price of the underlying asset. Or that the strike price of a put option is above the market price of the underlying asset. An option that is in the money has intrinsic value, whereas an option that is out of the money (OTM) does not.
Well, IT does not mean the trader will automatically make a profit on the trade because an option costs money to buy. This just means the option is worth exercising.
A call option is ITM when its exercise price is below the current price of the underlying asset. Whereas a put option is when its exercise price is above the current market price.
If the asset price has not gone beyond the strike price, it is referred to as out of the money. And if it is equal to the strike price, it is at the money. So, if it is possible, a trader always wants the option to be in the money at the time of expiry. Otherwise, it will expire worthlessly.
For example, If the strike price of a call option is $13, and the underlying stock is currently trading at $12.70, that option is out of the money. The buyer of the call isn’t going to make any significant money until the price starts rising above $13 (ITM). The higher above $13 the price goes, the more in the money the option is.
HOW TO USE
To buy some option you will need money. So it will only be considered profitable if the amount made on the trade exceeds the initial premium paid.
If an option is already ITM, then the premium can be higher. The premium of an option can also be higher if there is a greater chance that the option will soon be in the money. Such as in periods of higher volatility or if the options have an expiry date much further in the future.