In-The-Money Call

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In The Money (ITM)

What Is In The Money (ITM)?

In the money (ITM) is a term that refers to an option that possesses intrinsic value. ITM thus indicates that an option has value in a strike price that is favorable in comparison to the prevailing market price of the underlying asset:

  • An in the money call option means the option holder has the opportunity to buy the security below its current market price.
  • An in the money put option means the option holder can sell the security above its current market price.

An option that is ITM does not necessarily mean the trader is making a profit on the trade. The expense of buying the option and any commission fees must also be considered. In the money options may be contrasted with out of the money (OTM) options.

Key Takeaways

  • A call option is in the money (ITM) if the market price is above the strike price.
  • A put option is in the money if the market price is below the strike price.
  • An option can also be out of the money (OTM) or at the money (ATM).
  • In the money options contracts have higher premiums than other options that are not ITM.

A Brief Overview of Options

Investors who purchase call options are bullish that the asset’s price will increase and close above the strike price by the option’s expiration date. Options are available to trade for many financial products such as bonds and commodities but, equities are one of the most popular for investors.

Options give the buyer the opportunity—but not the obligation—of buying or selling the underlying security at the contract-stated strike price, by the specified expiration date. The strike price is the transaction value or execution price for the shares of the underlying security.

Options come with an upfront fee cost—called the premium—that investors pay to buy the contract. Multiple factors determine the premium’s value. These factors include the current market price of the underlying security, time until the expiration date, and the value of the strike price in relationship to the security’s market price. Typically, the premium shows the value market participants place on any given option. An option that has value will likely have a higher premium associated with it versus one that has little chance of making money for an investor.

The two components of options premium are intrinsic and extrinsic value. In the money options have both intrinsic and extrinsic value, while out of the money options’ premium contain only extrinsic (time) value.

In the money options will have a delta greater than 50.0

Explaining In The Money Call Options

Call options allow for the buying of the underlying asset at a given price before a stated date. The premium comes into play when determining whether an option is in the money or not, but can be interpreted differently depending on the type of option involved. A call option is in the money if the stock’s current market price is higher than the option’s strike price. The amount that an option is in the money is called the intrinsic value meaning the option is at least worth that amount.

For example, a call option with a strike of $25 would be in the money if the underlying stock was trading at $30 per share. The difference between the strike and the current market price is typically the amount of the premium for the option. Investors looking to buy a particular in the money call option will pay the premium or the spread between the strike and the market price.

However, an investor holding a call option that’s expiring in the money can exercise it and earn the difference between the strike price and market price. Whether the trade was profitable or not depends on the investor’s total expense of buying the contract and any commission to process that transaction.

It is important to note that ITM doesn’t mean the trader is making money. When buying an ITM option, the trader will need the option’s value to move farther into the money to make a profit. In other words, investors buying call options need the stock price to climb high enough so that it at least covers the cost of the option’s premium.

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Explaining In The Money Put Options

While call options allow the purchase of an asset, a put option accomplishes the opposite action. Investors buy these options contracts that give them the ability to sell the underlying security at the strike price when they expect the value of the security to decrease. Put option buyers are bearish on the movement of the underlying security.

An in the money put option means that the strike price is above the market price of the prevailing market value. An investor holding an ITM put option at expiry means the stock price is below the strike price and it’s possible the option is worth exercising. A put option buyer is hoping the stock’s price will fall far enough below the option’s strike to at least cover the cost of the premium for buying the put.

As the expiration date nears, the value of the put option will fall in a process known as time decay.

Pros & Cons

A call option holder that is in-the-money (ITM) at expiry has a chance to make a profit if the market price is above the strike price.

An investor holding an in-the-money put option has a chance to earn a profit if the market price is below the strike price.

In-the-money options are more expensive than other options since investors pay for the profit already associated with the contract.

Investors must also consider premium and commission expenses to determine profitability from an in the money option.

Other Considerations

When the strike price and market price of the underlying security are equal, the option is called at the money (ATM). Options can also be out of the money meaning the strike price is not favorable to the market price. An OTM call option would have a higher strike price than the market price of the stock.

Conversely, an OTM put option would have a lower strike price than the market price. An OTM option means that the option has yet to make money because the stock’s price hasn’t moved enough to make the option profitable. As a result, OTM options usually have lower premiums than ITM options.

In short, the amount of premium paid for an option depends in large part of the extent an option is ITM, ATM, or OTM. However, many other factors can affect the premium of an option including how much the stock fluctuates, called volatility, and the time until the expiration. Higher volatility and a longer time until expiration mean a greater chance that the option could move ITM. As a result, the premium cost is higher.

Real World Example of ITM Options

Let’s say an investor holds a call option on Bank of America (BAC) stock with a strike price of $30. The shares currently trade at $33 making the contract in the money. The call option allows the investor to buy the stock for $30, and they could immediately sell the stock for $33, giving them a $3 per share difference. Each options contract represents 100 shares, so the intrinsic value is $3 x 100 = $300.

If the investor paid a premium of $3.50 for the call, they would not profit from the trade. He would have paid $350 ($3.50 x 100 = $350) while only gaining $300 on the difference between the strike price and market price. In other words, he’d lose $50 on the trade. However, the option is still considered ITM because, at expiry, the option will have a value of $3 even though John’s not earning a profit.

Also, if the stock price fell from $33 to $29, the $30 strike price call is no longer ITM. It would be $1 OTM. It’s important to note that while the strike price is fixed, the price of the underlying asset will fluctuate affecting the extent to which the option is in the money. An ITM option can move to ATM or even OTM before its expiration date.

In The Money Call Options

In The Money Call Option

In The Money Calls

Definition of “In The Money Call Option”:

A call option is said to be an in the money call when the current market price of the stock is above the strike price of the call option. It is an “in the money call” because the holder of the call has the right to buy the stock below its current market price. When you have the right to buy anything below the current market price, then that right has value. That value is equal to at least the amount that your purchase price (strike price) is below the market price. In the world of call options, your call is “in the money” when the strike price is less than the current market price of the stock. The amount that your call’s strike price is below the current stock price is called its “intrinsic value” because you know it is worth at least that amount. This compares to an out of the money call option which is call where the strike price of the call is above the stock’s current market price.

Definition of “in the money put”:

For a put option, which is the right to sell a stock at a certain price, to be an in the money put then the current market price of the stock would be below the strike price of the put option. It is “in the money” because the holder of this put option has the right to sell the stock above its current market price. When you have the right to sell anything above its current market price, then that right has value. That value is equal to at least the amount that your sales price is above the market price. In the world of put options, your put option is “in the money” when the strike price of your put is above the current market price of the stock. The amount that your put option’s strike price is above the current stock price is called its “intrinsic value” because you know it is worth at least that amount.

Example of an “In the Money CALL”: If the price of YHOO stock is at $37.75, then a call with a strike price below $37.75 is an example of an “in the money call”.

Why are they in the money? They are in the money because those call options already have an intrinsic value. If you have the right to buy YHOO at $35 and the current market price is $37.75, then that YHOO $35 call is in the money $2.75. If you had that option and you had to exercise it, you could buy shares of YHOO at $35 and sell them immediately in the open market for $37.75 and pocket the $2.75 profit.

Likewise the YHOO $30 call is in the money $7.75 and the YHOO $25 call is in the money $12.75. This in the money value establishes a minimum or floor price for that option.

If YHOO is at $37.50, then all of the call options with a strike price of $38 and higher are out of the money.

Example of an “In the Money PUT”: If the price of MSFT stock is at $37.50, then all of the put options with strike prices at $38 and above are in the money puts.

Why are they in the money? They are in the money because those options already have an intrinisc value. If you have the right to sell MSFT at $40 and the current market price is $37.50, then that MSFT $40 put is in the money $2.50. If you had that put and you had to exercise it, you could sell shares of MSFT at $40 and buy them immediately in the open market for $37.50 and pocket the $2.50 profit.

Likewise the MSFT $45 put is an in the money $7.50 and the MSFT $50 put is in the money $12.50. This in the money value establishes a minimum or floor price for that option.

If MSFT is at $37.50, then all of the put options with a strike price of $37 and lower are out of the money.

In The Money Options

In The Money Call and Put Option

In the Money Call

In the Money Put

Definition of “In the Money Call”:

A call option is said to be in the money when the current market price of the stock is above the strike price of the call. It is “in the money” because the holder of the call has the right to buy the stock below its current market price. When you have the right to buy anything below the current market price, then that right has value. That value is also referred to as the option’s “intrinsic value.” That value is equal to at least the amount that your purchase price (strike price) is below the market price. In the world of call options, your call options are “in the money” when the strike price of your calls are less than the current market price of the stock. The amount that your call options’ strike price is below the current stock price is called its “intrinsic value” because you know it is worth at least that amount. This compares to an out of the money call option which is call option where the strike price of the call is above the stock’s current market price.

Definition of “In The Money Put”:

A put option is said to be in the money when the strike price of the put is above the current price of the underlying stock. It is “in the money” because the holder of this put has the right to sell the stock above its current market price. When you have the right to sell anything above its current market price, then that right has value. That “intrinsic value is equal to at least the amount that your strike price is above the market price. In the world of put options, your put option is “in the money” when the strike price of your put is above the current market price of the stock. The amount that your put option’s strike price is above the current stock price is called its “intrinsic value” because you know it is worth at least that amount.

Example of an “In the Money CALL Option”:

If the price of YHOO stock is at $37.75, then all calls with a strike price below $37.75 are examples of “in the money calls”.

Why are they in the money or ITM? They are ITM because those call options already have an intrinsic value. If you have the right to buy YHOO at $35 and the current market price is $37.75, then that YHOO $35 call is in the money $2.75. If you had that option and you had to exercise it, you could buy shares of YHOO at $35 and sell them immediately in the open market for $37.75 and pocket the $2.75 profit.

Likewise the YHOO $30 call is in the money $7.75 and the YHOO $25 call $12.75. This in the money value establishes a minimum or floor price for that option.

If YHOO is at $37.50, then all of the call options with a strike price of $38 and higher are out of the money.

Example of an “In the Money PUT Option”:

If the price of MSFT stock is at $37.50, then all of the puts with strike prices at $38 and above are in the money.

Why are they in the money? because those options already have an intrinsic value. If you have the right to sell MSFT at $40 and the current market price is $37.50, then that MSFT $40 put is in the money $2.50. If you had that option and you had to exercise it, you could sell shares of YHOO at $40 and buy them immediately in the open market for $37.50 and pocket the $2.50 profit.

Likewise the MSFT $45 put is in the money $7.50 and the MSFT $50 put is in the money $12.50. This value establishes a minimum or floor price for that option.

If MSFT is at $37.50, then all of the put options with a strike price of $37 and lower are out of the money.

Start learning about what are put options now

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