In the Money

In the Money

3 min read

In the money options strike prices (ITM) are strikes that trade above or below the current price of the stock. These strikes are the most expensive because they trade below the price of the stock on the call side. They trade above the price of the stock on the put side. The deeper in the money you go the more expensive the options contract will be because you have a better chance of having a winning trade. Add Probability of ITM to your brokerage platform to see your probability of success on the trade. 

In the money refers to the strike price of an options contract and where the price is in relation to the market. ITM is when a call’s strike price is lower than the market price. An in the money put means that the strike price is above the market price.

In the money is one of the three “money” components to options trading. ITM options contracts are seen differently depending on if they’re calls or puts.

Any in the money options contracts, whether bullish or bearish, mean that there’s intrinsic value.

Strike prices are made up of intrinsic and extrinsic value. There are three different types moneyness options contracts; in the money, at the money and out of the money. Out of the money contracts have no intrinsic value.

Just another part of options trading where profit and loss is affected. Hence the strike price is one of, if not the most important part of picking an contract to buy.

Being in the money doesn’t mean you’ll make a profit. However, it does give you a much chance. The contract has intrinsic value, therefore it’s worth exercising.

For example, you purchase a call at $10. The stock is currently trading at $14. That call options is considered to be in the money. In essence, you could sell it for a gain of $4.

Each options contract controls 100 shares. So you’d multiply 4 x 100 and it comes to $400. Another great things about options contracts is that they’re not as expensive as buying shares outright.

In the Money Example

How In the Money Options Contracts Work

In the money options contracts for calls are lower than the market price. This makes them more expensive to buy. That’s not necessarily a bad thing as it’s still cheaper than buying 100 shares of a stock.

In the money options contracts tend to be the safer bet if buying naked calls and puts. Hence why they cost more than at or out of the money. Options contracts do expire. The time value is also known as extrinsic value.

This also affects the profit and loss of a contract. An in the money options contract with a short expiration date will be cheaper than one that’s 1-2 months out. However, the more time value there is, the higher the chance of making a profit.

A put option that’s in the money, has a strike that’s higher than the market price. Put options are the bearish option and the equivalent to short selling. You can both buy and sell put options.

The Bottom Line

In the money options contracts are the most popular contracts to trade. They can give you a cushion but you need the time to make sure it’s the right trade. Options have many moving parts. Make sure to take the time to study how options work as well as practice trading them. Once they’re been mastered, they’re a great strategy to use.

If you need more help, take our options trading course.

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