The expression “in the money” (ITM) is a reference to an option with intrinsic value. A choice that’s in the money provides a profit potential due to the relation with the strike cost and market value of the asset that is used to fund it.
A call option that is in the money means the option holder has the ability to purchase the security at a lower price than the current market value.
In-the-money puts are options where that the option holder is able to sell the security at a price higher than the current market value.
Due to the cost (such for commissions) that come in options, an option that is an ITM option does not necessarily mean that a trader is likely to earn money when exercising it.
Options may also be made in cash (ATM) or out of the cash (OTM).
Understanding Options
Options contracts are available on a variety of financial products, like commodities and bonds. Options on equity are among the most well-known kinds of options for investors.
Options allow buyers the option, but not the obligation — to buy and sell the securities that is underlying an option at the contract’s strike price before the expiration date. It is the amount the investor would pay for shares. It’s the execution value (or transaction value).
Premium
Investors pay the premium for buying the option. The premium is determined by a variety of factors. value. The factors that determine the value are the price of the market for the security, the time to the expiration date, as well as what the price of strike is relative to the security’s price on the market.
The price is the amount that market participants put on an option. If an option is valuable, it is likely to be worth a greater price than an option that has less chance of making profits in the eyes of an investor.
Intrinsic Value
The two parts of the premiums on options are intrinsic and extrinsic. In-the-money options include both intrinsic and extrinsic value however, out of the money options premiums have just extrinsic (time) value.
In-the-Money Call Option
Call options permit the purchase of an underlying asset at a certain price before a specific date. The amount of premium paid depends on whether the option is worth it or not, however, it is interpreted in different ways, dependent on what type of options are being used.
The investors who buy call options are convinced that the value of the asset will rise and surpass the strike price before the date that the option expires. They are optimistic about the direction of price for the stock.
Call options are in the money when the current price of the stock is greater than the strike price of the option. The amount an option is in market is known as the intrinsic value. It is a sign an option has value at the very least the amount.
A call option that has the strike at $25 is in the black in the event that the stock was being traded at $30/share. A difference of the strike value and the market price is usually the price you pay to purchase the call option. Thus, investors looking to buy an option that is in the money will be required to pay the premium, or the difference between the strike price and market price.
An investor who holds an option to call that expires in cash is able to exercise it and earn more than the amount of difference in the strike and the market price. The profitability of the trade or not will depend on the total transaction cost.
So, ITM doesn’t necessarily mean that the trader will earn profit. In order to make money in the first place, the trader requires the option’s in-the money value to rise to more than pay for the price of the premium.
Options for In-the-Money Puts
A put option contract grants investors the option of selling the security at the strike price of the contract prior to when the contract expires.
Put options are bought by investors who are convinced that the value will fall and will be below the strike price on the expiration date of the option. They are bullish on the value direction for the security.
In-the-money puts mean that strike prices are higher than the market value of the security that is being traded. Put options that are in the money when it expires could be worthwhile to exercise. Put option buyers are hoping that the price of the stock will drop enough below the strike of the option to be more than the cost of buying the put.
Pros and Pros and
Pros
An investor who has an option to call which is valued at the market (ITM) at the expiry date is able to earn an income as that the price of the option is higher than what the price of strike is.
An investor who holds an in-the-money put option is able to make a profit as that the price of the option is lower than what the price of strike.
Cons
Options that are in-the-money are more expensive than other options because investors are responsible for the profits already earned by the contract.
Investors should also take into consideration the cost of commission and premium to assess the profitability of an in-the money option.
Special Beacons
ATM options as well as OTM options
If strikes price as well as the market price of the security in question are the same, the option is deemed to be at the time of purchase (ATM). Options may also be in the market (OTM) that is to say they are not intrinsically valuable.
The OTM call option has an increased cost of strike than the price that the stock is trading at. On the other hand an OTM put option will come with a less attractive strike over the current market value.
Because the OTM option is less valuable as the ITM alternative, the latter typically has a lower price.
Premium Values
In simple terms the amount that an option pays is contingent heavily on whether an option is an ITM, ATM, or OTM. Other factors may impact the value of an option such as how often the stock moves (its volatile) and the length of time before expiration. More volatility and a longer time to expire mean more possibility that the option may change ITM. This means that the cost of the option is greater.
Examples of ITM Options
Let’s suppose an investor has an option call on Bank of America (BAC) stock, with a strike price of $30. The stock is currently trading at $33. So, this option is currently in cash. The investor could purchase the shares for $30, and then immediately sell it for $33 to earn the gain that is $3 per share. Since each option contract is 100 shares, its intrinsic value is $3 300 x 100 = $33.
Now let us say that the investor’s expense was $3.50. They’d have paid $350 ($3.50 100 times $350 = $350) but only made $300. Also they’d have lost $50 on the deal. In this instance even though the alternative is ITM however, it wouldn’t result in a profitable trade.
If the stock price dropped from $33 to $29 the call option that has the $30 strike price would not ITM anymore. It’s now $1 OTM. It’s important to keep in mind that even though the strike price is fixed, the value of the asset that is used to fund it can fluctuate, which will influence the degree to the extent that the option is in the cash. A ITM option could be changed to ATM as well as OTM prior to expiration.
What is a strike price?
The term “strike price” refers to set by an option contract to be the amount at which an investor is able to purchase (with the option of a call) or to sell (with put options) the security in the contract that the contract is based on.
What does the word “deep” in Money mean?
“Deep in the Money” is options that are priced by at minimum $10. For a call option it means that the strike price will be higher than the current market price. In the case of a put option the strike price will be greater than $10 over that price. Because of the extent to which they’re in black, the price of these options generally fluctuate in the same way as the value of the asset that is the basis for the option moves.
How Much is an At-the Money option worth?
Options at-the-money are those that have a strike price exactly the same as the market value of the security that is the basis. In this scenario the option cannot be redeemed for money. earned from exercising the option. Therefore, the option is of no value.
