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In the Money Meaning: Call and Put Options Examples
What is In the Money (ITM)?
"In-the-money" (ITM) is a term used to describe an option that has an intrinsic value greater than zero. The amount by which an option is in-the-money is referred to as its intrinsic value.
In general, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option. Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).
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For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
How moneyness and intrinsic value relate to ITM
Because moneyness relates to the value of an option, the two primary components of an option’s value - intrinsic and extrinsic value - provide further perspective on the concept of moneyness.
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
Taken all together, that means for a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
In-the-money call options
For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price.
Call Option: An ITM call option is one where the current market price of the underlying asset is higher than the option's strike price. In this case, exercising the option would provide immediate economic benefit.
Intrinsic Value: Current Market Price - Strike Price
In-the-money put options
For a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
Put Option: An ITM put option is one where the current market price of the underlying asset is lower than the option's strike price.
Intrinsic Value: Strike Price - Current Market Price
In-the-money options example
Imagine the hypothetical stock XYZ Corp, which is currently trading at $50 per share. If one were to trade a $50-strike call, that would represent an ATM option, while a $45-strike call would represent an ITM option, and a $55-strike call would represent an OTM option.
Generally speaking, ITM options have a high absolute delta value (close to 1 or -1), ATM options have a delta around 0.5 for calls and -0.5 for puts, and OTM options have a low absolute delta (close to zero).
Because moneyness relates to the value of an option, the two primary components of an option’s value - intrinsic and extrinsic value - provide further perspective on the concept of moneyness.
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
Taken all together, that means for a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
On the other hand, a call option is considered out-of-the-money (OTM) when the underlying asset's current market price is lower than the option's strike price, whereas a put option is considered out-of-the-money (OTM) when the underlying asset's current market price is higher than the option's strike price.
If there is intrinsic value in an option, that by definition means it is an in-the-money (ITM) option.
On the other hand, any and all value in an out-of-the-money (OTM) option is considered extrinsic value. There is no intrinsic value in an OTM option.
Generally speaking, ITM options have a high absolute delta value (close to 1 or -1), ATM options have a delta around 0.5 for calls and -0.5 for puts, and OTM options have a low absolute delta (close to zero).
In-the-money summed up
In the options universe, "in-the-money" (ITM) is a term used to describe an option that has an intrinsic value greater than zero. The amount by which an option is in-the-money is referred to as its intrinsic value.
In general, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option. Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).
For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
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