Within the Money: Definition, Call & Put Options, and Example

What Is “within the Money” (ITM)?

The phrase in the cash (ITM) refers to an option that possesses intrinsic value. An option that is in the cash is an option that presents a profit opportunity attributable to the connection between the strike price and the prevailing market price of the underlying asset.

  • An in-the-money call option means the choice holder should buy the safety below its current market price.
  • An in-the-money put option means the choice holder can sell the safety above its current market price.

As a consequence of the expenses (equivalent to commissions) involved with options, an option that’s ITM doesn’t necessarily mean a trader will make a profit by exercising it.

Options can be at the cash (ATM) and out of the cash (OTM).

Key Takeaways

  • A call option is in the cash (ITM) if the market price is above the strike price.
  • A put option is in the cash if the market price is below the strike price.
  • An option can be out of the cash (OTM) or at the cash (ATM).
  • In-the-money options contracts have higher premiums than other options that will not be ITM.
  • Investors should account for the prices of shopping for options when figuring potential take advantage of an in the cash option.

Understanding Options

Options contracts exist on many financial products, including bonds and commodities. Nonetheless, options on equities are one of the popular forms of options for investors.

Options give buyers the chance—but not the duty—to purchase or sell the safety underlying the choice contract on the contract-stated strike price by the desired expiration date. The strike price is what the investor would pay for the shares. It is the execution price (or transaction value).

Premium

Investors pay a fee called the premium to purchase an option contract. Multiple aspects determine the premium’s value. These aspects include the present market price of the underlying security, time until the expiration date, and the worth of the strike price in relationship to the safety’s market price.

The premium indicates the worth that market participants place on any given option. An option that has value will likely have the next premium than one which has little likelihood of making a living for an investor.

Intrinsic Value

The 2 components of options premiums are intrinsic and extrinsic value. In-the-money options have each intrinsic and extrinsic value, while out of the cash options premiums contain only extrinsic (time) value.

The choices market could be extremely volatile, especially in times that move the market, equivalent to large-scale macroeconomic events like natural disasters and economic plunges.

In-the-Money Call Options

Call options allow for the acquisition of the underlying asset at a given price before a stated date. The quantity of premium depends upon whether an option is in the cash or not, but could be interpreted in a different way, depending on the variety of option involved.

Investors who purchase call options consider that the underlying asset’s price will increase and shut above the strike price by the choice’s expiration date. They’re bullish on the value direction of the stock.

A call option is in the cash if the stock’s current market price is higher than the choice’s strike price. The quantity that an option is in the cash known as the intrinsic value. It implies that the choice is price at the very least that quantity.

A call option with a strike of $25 can be in the cash if the underlying stock were trading at $30 per share. The difference between the strike price and the present market price is usually the quantity of the premium for the choice. So, investors seeking to buy a specific in-the-money call option pays the premium or the spread between the strike and the market price.

An investor holding a call option that is expiring in the cash can exercise it and earn the difference between the strike price and market price. Whether the trade is profitable or not depends upon the investor’s total transaction expense.

Due to this fact, ITM doesn’t necessarily mean the trader will generate income. To make a profit, the trader needs the choice’s in-the-money value to extend in order that it does greater than cover the fee of the choice’s premium.

Time decay refers back to the lack of value that options experience because the contract expiration date approaches. The closer an option contract gets to the expiration date, the greater the decrease in value might be. Nonetheless, in-the-money options see less time decay (attributable to their intrinsic value) than options which might be out of the cash or at the cash.

In-the-Money Put Options

A put option contract gives investors the fitting to sell the underlying security on the contract strike price before the expiration date.

Investors who purchase put options consider that the underlying asset’s price will decrease and shut below the strike price by the choice’s expiration date. They’re bearish on the value direction of the underlying security.

An in-the-money put option implies that the strike price is above the market price of the underlying security. A put option that is in the cash at expiry could also be price exercising. A put option buyer is hoping the stock’s price will fall far enough below the choice’s strike to greater than cover the premium paid to purchase the put.

Pros and Cons

Pros

  • An investor with a call option that’s in the cash (ITM) at expiry has a likelihood to make a profit for the reason that market price is above the strike price.

  • An investor holding an in-the-money put option has a likelihood to earn a profit for the reason that market price is below the strike price.

Cons

  • In-the-money options are costlier than other options since investors pay for the profit already related to the contract.

  • Investors must also consider premium and commission expenses to find out profitability of an in-the-money option.

Special Considerations

ATM and OTM options

When the strike price and market price of the underlying security are equal, the choice is taken into account at the cash (ATM). Options can be out of the cash (OTM), meaning they haven’t any intrinsic value.

An OTM call option would have the next strike price than the market price of the stock. Conversely, an OTM put option would have a lower strike price than the market price.

Since an OTM option has less value than an ITM option, it normally could have a lower premium.

Premium Values

Briefly, the quantity of premium paid for an option depends largely on the extent an option is ITM, ATM, or OTM. Nonetheless, other aspects can affect the premium of an option including how much the stock fluctuates (its volatility) and the time until the expiration. Higher volatility and an extended time until expiration mean a greater likelihood that the choice could move ITM. Because of this, the premium is higher.

Example of ITM Options

For example an investor holds a call option on Bank of America (BAC) stock with a strike price of $30. The shares currently trade at $33. Due to this fact, the choice contract is in the cash. The investor should buy the stock for $30 and immediately sell it for $33 for a gain of $3 per share. Since each option contract represents 100 shares, the intrinsic value is $3 x 100 = $300.

Now say the investor’s cost was a premium of $3.50. They’d have paid $350 ($3.50 x 100 = $350) but gained only $300. In other words, they’d lose $50 on the trade. So, on this case, regardless that the choice is ITM, it could not make for a profitable trade.

If the stock price fell from $33 to $29, the decision option with the $30 strike price isn’t any longer ITM. It will be $1 OTM. It is important to notice that while the strike price is fixed, the value of the underlying asset will fluctuate and affect the extent to which the choice is in the cash. An ITM option can move to ATM and OTM before its expiration date.

What Is a Strike Price?

A strike price is the value designated by an options contract as the value at which an investor has the fitting to purchase (with a call option) or sell (with a put option) the contract’s underlying security.

What Does Deep within the Money Mean?

Deep in the cash refers to options which might be in the cash by at the very least $10. For a call option, which means the strike price can be greater than $10 under the prevailing market price. For a put option, the strike price can be greater than $10 above the market price. As a consequence of how deeply they’re in the cash, the costs of those options normally move just as the value of the underlying asset moves.

How Much Is an At-the-Money Option Price?

At-the-money options are options where the strike price is identical because the market price of the underlying security. In such an instance, no money could be made by exercising the choice. Thus, the choice has no intrinsic value.

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