What Is ‘In the Money’ in Options Trading?

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Contributor, Benzinga
October 19, 2023

An options contract gives you the right to buy or sell a stock (or other asset) at a given price. This article will take a look at in the money options and how they can be used to your strategic advantage and to help you meet your investment goals. In addition, a stock market trading platform can provide research tools and educational content. 

What Does ‘In the Money’ Mean?

The phrase “in the money” (ITM) is used to refer to a stock option that has intrinsic value. This means that exercising the stock option makes better financial sense than if you did not have the option contract. In other words, an ITM contract presents the opportunity to profit from the purchase or sale of stock and is usually a good time for an option to be exercised.

In the Money (ITM) vs. Out of the Money (OTM) Options

Another way to understand ITM contracts is to compare them to “out of the money” (OTM) options. For a contract to be ITM, it has to offer value to the contract holder. This means that if you buy or sell the stock, you’ll have a greater opportunity for profit than if you simply used the current market value of the stock.

Otherwise, the stock will be considered out of the money (OTM). An OTM option is one in which there is no value in exercising the option — you’d be better off buying or selling the stock at the current market price. But some traders point out that OTM options are often cheaper because they have no intrinsic value, and while they offer greater risk, this can translate into a reward if the price should swing in your favor.

How Does In The Money Work?

An option contract will provide you with the right (though not the requirement) to buy or sell a stock at a given price. This is what’s known as the “strike price.” 

A stock option can be in the money when the strike price moves in a favorable direction. But that depends on whether you use your contract to buy or sell an asset. Here’s how both types of contracts work.

When Is a Call Option In The Money?

A call option gives the contract owner the right to buy a stock at a given price. In this case, the call option is in the money only when the stock value trends upward over a specified period of time. Exercising your call option would allow you to purchase shares of that stock at a discount, which increases your chances of making a profit.

When Is a Put Option In The Money?

A put option gives you the right to sell a stock at a given price. So your put option is only in the money if the stock price trends downward. This allows you over a specified period of time to sell the stock at a higher price than its current value, increasing your chances of making a profit.

Advantages of In The Money Options

ITM options offer several unique advantages.

1. Greater Opportunity for Profit

An investor who exercises an ITM has a greater chance of earning a profit — either by selling an option at a price higher than the current value or by buying an option at a reduced price.

2. Flexible Strategies

An ITM option can help you maximize the value of your options contracts while also providing you with flexible options for managing your portfolio. 

Things to Consider with In The Money Options

Investors should consider a few details about an ITM option trade.

1. No Guarantee of Profit

While ITM options offer the potential for greater returns, there’s no guarantee that they’ll produce a profit because you’ll also need to factor in premium and commission expenses.

2. Requires Close Monitoring

Determining when an option is ITM requires close observation and monitoring. Investors will need to invest time to make sure they exercise an option at the moment of greatest profitability.

3. Lower Liquidity

Stock options contracts are typically focused on individual stocks. These stocks may or may not have a great deal of liquidity on the market, meaning you may face challenges when attempting to trade shares of these stocks.

Example of In The Money

Imagine that you have an option to purchase 100 shares of Company A. Your call option grants you the right to purchase these shares at a strike price of $250 per share.

Now, imagine that Company A is currently trading at $350 per share. This means that your option contract is officially in the money, with an intrinsic value of $100 ($350 – $250).

You have three choices. One, you can exercise your option and purchase this stock. Second, you can wait for the stock’s price to rise even higher to maximize the value of your contract. And third, you can sell the option itself but don't forget to factor in brokerage fees. This may impact how much you profit from the trade.

Become a Better Trader

In the money options contracts are those that offer the greatest promise of return. Knowing when to exercise your options can make you a better trader and help you maximize the benefit of any stock options your employer may provide.

Frequently Asked Questions

Q

Is it better to trade in the money options?

A

ITM options offer a greater chance of returns, though some traders take the risk of OTM options in the hopes of a swing in price.

Q

Why trade in the money options?

A

ITM options offer low risk and a high chance of reward.

Q

Can you buy options that are in the money?

A

Yes, you can purchase an ITM option with a call option.

Sarah Edwards

About Sarah Edwards

Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.