When traders talk about options, you will hear terms like "in the money," "at the money," and "out of the money." These terms describe the relationship between the option's strike price and the current stock price. Understanding "moneyness" helps you choose the right options and understand your position's risk and reward.
What Does In The Money Mean?
An option is "in the money" (ITM) when it has intrinsic value. This means the option would be worth something if you exercised it right now.
Simple rule:
- Call option: ITM when stock price is ABOVE the strike price
- Put option: ITM when stock price is BELOW the strike price
ITM Call Options
A call option is in the money when you could exercise it to buy shares below the current market price.
Example: ITM Call
Stock ABC is trading at $85.
- $80 strike call: ITM by $5 (you can buy at $80, worth $85)
- $75 strike call: ITM by $10 (you can buy at $75, worth $85)
- $70 strike call: ITM by $15 (you can buy at $70, worth $85)
All these calls have intrinsic value because the stock is above their strike prices.
ITM Put Options
A put option is in the money when you could exercise it to sell shares above the current market price.
Example: ITM Put
Stock XYZ is trading at $45.
- $50 strike put: ITM by $5 (you can sell at $50, stock worth $45)
- $55 strike put: ITM by $10 (you can sell at $55, stock worth $45)
- $60 strike put: ITM by $15 (you can sell at $60, stock worth $45)
All these puts have intrinsic value because the stock is below their strike prices.
Calculating How Deep an Option is ITM
The "depth" of an ITM option is its intrinsic value:
- ITM Call: Stock Price - Strike Price = Intrinsic Value
- ITM Put: Strike Price - Stock Price = Intrinsic Value
An option can be slightly ITM ($0.50 intrinsic value) or deep ITM ($20+ intrinsic value). The deeper ITM an option is, the more it behaves like the underlying stock.
Characteristics of ITM Options
Higher Premium
ITM options cost more than OTM options because they already have intrinsic value. You are paying for real value, not just potential.
Higher Delta
ITM options have higher delta, meaning they move more in response to stock price changes. A deep ITM call might have a delta of 0.80-0.95, moving almost like the stock itself.
Lower Extrinsic Value
Deep ITM options have less extrinsic (time) value. Most of their price is intrinsic value that will not decay.
Higher Probability of Profit
ITM options have a higher probability of finishing with value at expiration. However, this comes at the cost of lower percentage returns.
Trade-off: ITM options are safer but offer lower percentage returns. OTM options are riskier but offer higher percentage returns if the trade works.
When to Use ITM Options
Stock Replacement
Deep ITM calls can act as a cheaper substitute for owning stock. You get similar price exposure with less capital and limited downside risk.
Conservative Directional Bets
If you want to bet on direction but limit risk, ITM options give you immediate value with less reliance on the stock moving significantly.
Less Time Decay Exposure
Because ITM options have less extrinsic value, they experience less time decay. This makes them better for longer holding periods.
Example: ITM vs OTM for the Same Trade
Stock is at $100. You are bullish and want to buy calls:
- $95 call (ITM): Costs $8.00 ($5 intrinsic + $3 extrinsic)
- $100 call (ATM): Costs $4.00 (all extrinsic)
- $105 call (OTM): Costs $2.00 (all extrinsic)
If stock goes to $110:
- $95 call worth at least $15 (87% gain)
- $100 call worth at least $10 (150% gain)
- $105 call worth at least $5 (150% gain)
The ITM call had lower percentage gains but was less likely to expire worthless.
ITM Options at Expiration
ITM options have value at expiration and will typically be:
- Exercised: If you hold till expiration, most brokers auto-exercise ITM options
- Sold before expiration: Most traders sell to close rather than exercise
- Assigned (if short): If you sold ITM options, expect assignment at expiration
Warning: If you let an ITM call expire and it is exercised, you will buy 100 shares at the strike price. Make sure you have the capital or close your position before expiration.
ITM Options and Assignment Risk
If you are short (sold) ITM options, you face assignment risk. The option buyer may exercise early, especially:
- For deep ITM options near expiration
- For calls before ex-dividend dates
- When there is very little extrinsic value remaining
Track Your ITM Positions
Pro Trader Dashboard helps you monitor all your options positions, including how deep ITM or OTM they are. Get alerts before expiration to avoid unwanted exercise or assignment.
Summary
An option is "in the money" when it has intrinsic value. Calls are ITM when the stock is above the strike; puts are ITM when the stock is below the strike. ITM options cost more but are less risky because they already have real value. They experience less time decay and have higher deltas. Use ITM options when you want conservative exposure or as a stock replacement strategy.
Next, learn about out of the money options and at the money options.