Filter
In the Money Meaning: Call and Put Options Examples
What is in the money (ITM)?
"In-the-money" (ITM) is a term used to describe an option that has an intrinsic value greater than zero. The amount by which an option is in-the-money is referred to as its intrinsic value.
In general, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option. Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).
.png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
How moneyness and intrinsic value relate to ITM
Because moneyness relates to the value of an option, the two primary components of an option’s value - intrinsic and extrinsic value - provide further perspective on the concept of moneyness.
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
Taken all together, that means for a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
In-the-money call options
For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price.
Call Option: An ITM call option is one where the current market price of the underlying asset is higher than the option's strike price. In this case, exercising the option would provide immediate economic benefit.
Intrinsic Value: Current Market Price - Strike Price
In-the-money put options
For a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
Put Option: An ITM put option is one where the current market price of the underlying asset is lower than the option's strike price.
Intrinsic Value: Strike Price - Current Market Price
In-the-money options example
Imagine the hypothetical stock XYZ Corp, which is currently trading at $50 per share. If one were to trade a $50-strike call, that would represent an ATM option, while a $45-strike call would represent an ITM option, and a $55-strike call would represent an OTM option.
Generally speaking, ITM options have a high absolute delta value (close to 1 or -1), ATM options have a delta around 0.5 for calls and -0.5 for puts, and OTM options have a low absolute delta (close to zero).
Because moneyness relates to the value of an option, the two primary components of an option’s value - intrinsic and extrinsic value - provide further perspective on the concept of moneyness.
In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option.
The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.
Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value.
Taken all together, that means for a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
On the other hand, a call option is considered out-of-the-money (OTM) when the underlying asset's current market price is lower than the option's strike price, whereas a put option is considered out-of-the-money (OTM) when the underlying asset's current market price is higher than the option's strike price.
If there is intrinsic value in an option, that by definition means it is an in-the-money (ITM) option.
On the other hand, any and all value in an out-of-the-money (OTM) option is considered extrinsic value. There is no intrinsic value in an OTM option.
Generally speaking, ITM options have a high absolute delta value (close to 1 or -1), ATM options have a delta around 0.5 for calls and -0.5 for puts, and OTM options have a low absolute delta (close to zero).
In-the-money summed up
In the options universe, "in-the-money" (ITM) is a term used to describe an option that has an intrinsic value greater than zero. The amount by which an option is in-the-money is referred to as its intrinsic value.
In general, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option. Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).
For a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.