What Are In-the-Money (ITM) Options?
Understand In-the-Money (ITM) options. Learn how an option's market position determines its intrinsic value and potential for immediate exercise.
“In-the-Money” (ITM) describes an options contract that possesses intrinsic value. This means the option holds immediate value if exercised, indicating a favorable relationship between its strike price and the underlying asset’s current market price. This state suggests a potential for profit for the option holder.
Defining In-the-Money for Call Options
A call option grants its holder the right, but not the obligation, to purchase an underlying asset at a specified price, known as the strike price, on or before a particular expiration date. For a call option to be “In-the-Money,” the underlying asset’s current market price must be higher than the option’s strike price. This condition makes it financially advantageous for the option holder to exercise their right to buy.
For example, if an investor holds a call option for Company XYZ with a strike price of $50, and the stock is currently trading at $55 per share, the call option is in-the-money by $5. Exercising this option allows the investor to buy shares at $50 and immediately sell them for $55, realizing a profit. This difference represents the option’s intrinsic value.
Defining In-the-Money for Put Options
Conversely, a put option provides its holder the right, but not the obligation, to sell an underlying asset at a predetermined strike price on or before its expiration. A put option is “In-the-Money” when the underlying asset’s current market price is lower than the option’s strike price. This scenario allows the option holder to sell the asset at a price higher than its current trading value.
For example, if an investor owns a put option for Company ABC with a strike price of $70, and the stock is currently trading at $65 per share, this put option is in-the-money by $5. Exercising this option permits the investor to sell shares at $70, even though the market price is $65, securing a beneficial transaction. This difference reflects the intrinsic value.
Implications of Being In-the-Money
An “In-the-Money” option possesses intrinsic value, representing the immediate profit an option holder would realize if exercised. This intrinsic value is calculated as the difference between the underlying asset’s market price and the option’s strike price, always a positive amount for ITM options. The presence of intrinsic value means an ITM option has a tangible worth based on current market conditions. This makes the option more likely to be exercised, as it offers a direct financial benefit to the holder. While exercising an ITM option captures this intrinsic value, its total value also includes time value, which is typically lost upon exercise before expiration.
Comparing Money-ness States
Options contracts are categorized into three “money-ness” states: “In-the-Money” (ITM), “At-the-Money” (ATM), and “Out-of-the-Money” (OTM). These classifications describe the relationship between an option’s strike price and the underlying asset’s current market price. An ITM option has intrinsic value due to a favorable strike price relative to the market.
“At-the-Money” options exist when the strike price is approximately equal to the underlying asset’s current market price, meaning they possess little to no intrinsic value. “Out-of-the-Money” options, conversely, have a strike price that is unfavorable compared to the current market price (higher for calls, lower for puts), and therefore hold no intrinsic value. The primary distinction among these states lies in whether the option currently offers an immediate profit if exercised.