• “In the money” (ITM) means an option already has intrinsic value: a call’s strike is below the market price; a put’s strike is above the market price.
– Intrinsic value = the amount the option is ITM; premium = intrinsic value + extrinsic value (time value, implied volatility).
– ITM options cost more than at-the-money (ATM) or out-of-the-money (OTM) options but have less time decay and higher delta.
– Profitability also depends on premiums, trading costs and taxes — an ITM option can still produce a net loss after those expenses.
Sources: Investopedia (Sydney Saporito), U.S. Securities and Exchange Commission, R. S. Johnson (Derivatives Markets and Analysis).
Understanding moneyness
Moneyness describes the relationship between the underlying asset’s current market price (S) and an option’s strike price (K):
– Call option:
• ITM if S > K
• ATM if S ≈ K
• OTM if S < K
– Put option:
• ITM if S K
Why moneyness matters
– Determines intrinsic value and helps set option premiums.
– Affects Greeks: ITM options usually have larger delta (move more with the underlying) and less relative time value (smaller theta decay per unit intrinsic).
– Guides strategy selection: ITM options are preferred when you want higher probability and stronger directional exposure; OTM options are cheaper and speculative.
Key definitions and formulas
– Intrinsic value:
• Call = max(0, S − K)
• Put = max(0, K − S)
– Extrinsic value (time value) = Option premium − Intrinsic value
– Break-even at expiration:
• Call break-even = K + premium paid
• Put break-even = K − premium paid
– Contract size (U.S. equity options): 1 contract = 100 shares (unless adjusted).
Examples (numeric)
1) Call ITM example (Apple-style):
– Strike K = $200, market S = $223
– Intrinsic value = $223 − $200 = $23 per share → $2,300 per contract
– If premium paid = $25 per share ($2,500), net = $2,300 − $2,500 = −$200 → still a loss after premium
2) Call example (Bank of America-style):
– K = $30, S = $33 → intrinsic = $3 × 100 = $300
– Premium = $3.50 × 100 = $350 → net = −$50 if exercised immediately
3) Put ITM example (Tesla-style):
– K = $249, S = $247 → intrinsic = $2 × 100 = $200
– Premium paid = $2.80 × 100 = $280 → net = −$80; share price must fall to $246 to break even
Practical steps to evaluate an ITM option (step-by-step)
1. Confirm moneyness and intrinsic value
• Compute intrinsic value: for calls S − K; for puts K − S.
• Multiply by 100 for standard equity contracts.
2. Compute break-even and potential profit
• Break-even = K ± premium (see formulas above).
• Estimate profit at target underlying prices and include commissions.
3. Separate premium into intrinsic and extrinsic components
• Extrinsic value = premium − intrinsic value.
• If extrinsic is large, you’re paying for time/volatility, not only intrinsic.
4. Check Greeks
• Delta: approximate sensitivity to underlying price; for ITM calls delta might be 0.6–0.9.
• Theta: time decay (lower for deep ITM relative to ATM).
• Vega: sensitivity to implied volatility (IV) — higher IV increases extrinsic value.
• Use Greeks to understand how the option’s value changes before expiration.
5. Evaluate liquidity and execution costs
• Look at bid-ask spread, volume and open interest. Wider spreads increase execution cost.
• Factor in commissions, exercise/assignment fees, and margin costs.
6. Consider time to expiration
• Short-dated ITM options have lower extrinsic value but less time for the trade to move favorably.
• Long-dated ITM options (LEAPS) cost more but offer more time for directional moves.
7. Examine implied volatility vs historical volatility
• If IV is high relative to realized volatility, extrinsic value is expensive — consider selling premium or using spreads.
• If IV is low, buying ITM may be more attractive.
8. Choose execution strategy
• Buy ITM option for directional exposure with higher delta.
• Buy a vertical spread (buy ITM and sell a higher-strike call / lower-strike put) to reduce net premium and IV risk.
• Sell (write) ITM options only if you understand assignment risk and margin requirements.
9. Decide whether to sell or exercise before expiration
• Often more efficient to sell the option to capture extrinsic value instead of exercising (which converts to stock and loses remaining extrinsic).
• Exercise may be appropriate near expiration if remaining extrinsic is negligible and you want the underlying position or to avoid assignment/settlement issues.
10. Manage position size and risk
• Determine position size by dollar risk or portfolio percentage.
• Consider stop-loss rules or hedges (e.g., protective options or stops on the underlying).
When to exercise vs sell
– American-style options: exercise any time before expiration, but early exercise is rarely optimal for calls unless there is a dividend large enough to justify it.
– Generally, sell the option if it has extrinsic value — selling captures intrinsic plus remaining time value. Exercise when extrinsic ≈ 0 or when you desire the shares (or to limit assignment risks).
– Consider taxes and settlement mechanics before exercising.
Risks and practical considerations
– Trading costs: commissions, spreads, and fees can turn an ITM option into a net loss.
– Assignment risk: short ITM options can be assigned at any time (American-style), requiring purchase/sale of the underlying.
– Liquidity: avoid illiquid strikes or expirations unless you can accept wide spreads.
– Volatility risk: increases or collapses in implied volatility can change option value independently of the underlying price.
– Tax treatment: gains from options can be taxed as capital gains, but rules vary with strategy and time held — consult a tax advisor.
Common strategies using ITM options
– Buying ITM calls/puts for directional exposure with higher delta (closer price tracking to the underlying).
– Covered calls: buy stock and sell ITM or ATM calls to generate premium (selling ITM gives higher premium but greater chance of assignment).
– Protective puts: buy ITM puts to protect an existing stock position (higher cost but more immediate downside protection).
– Vertical debit spreads: buy ITM and sell nearer ITM/ATM option to reduce premium and IV exposure.
Quick checklist before opening an ITM option trade
– Confirm intrinsic value and break-even.
– Check premium split (intrinsic vs extrinsic).
– Review Greeks (delta/theta/vega).
– Check liquidity, bid-ask, volume, open interest.
– Compare implied vs historical volatility.
– Calculate max loss, required margin and position size.
– Plan exit: target price, stop-loss, or expiration action (sell/exercise).
– Account for commissions, assignment risk and taxes.
Bottom line
“In the money” options have intrinsic value and provide stronger immediate exposure to the underlying’s price movements than ATM or OTM options. However, ITM status alone doesn’t guarantee a profitable trade — you must account for premiums, extrinsic value, trading costs, implied volatility and your exit plan. Use the steps above to evaluate ITM opportunities, manage risk, and choose appropriate trading strategies.
Sources and further reading
– Investopedia. “In the Money (ITM).” (Sydney Saporito)
– U.S. Securities and Exchange Commission. “Investor Bulletin: An Introduction to Options.”
– R. S. Johnson. Derivatives Markets and Analysis. John Wiley & Sons, 2017 (selected pages 187–223).
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.