Definition of In-the-Money (ITM) Option

Financial Terms Beginning with I

What is an In-the-Money (ITM) Option

An in-the-money option is an option contract that has intrinsic value if it were immediately exercised. This means when the strike price of an option, which is the predetermined price at which the holder has the right to buy (call option) or sell (put option) the underlying asset, is favorable as compared to the prevailing market price of the asset.

In-the-Money Option Call Option

A call option is in-the-money if the stock or underlying asset price is higher than the strike price. The holder of the option could buy the security at the strike price and then sell it at the current market price for a profit. As an example, if a stock XYZ has a market price of $45 and we own a 40 call option, the contract is in-the-money by $5.

In-the-Money Option Put Option

A put option is in-the-money if the stock or underlying asset price is lower than the strike price. The holder of the option could buy the security on the open market and then exercise the option to sell it at the higher strike price for a profit. As an example, if a stock ABC has a market price of $45 and we own a 50 put option, the contract is in-the-money by $5.

Does an In-the-Money Option Guarantee a Profit

Being in the money does not automatically guarantee a net profit. The holder must still factor in the premium paid for the option, as well as transaction costs associated with buying and selling assets. As such, even if an option is in-the-money, it may still result in a net loss if the costs outweigh the intrinsic value.

Final Thoughts on In-the-Money Options

In-the-money options play an important role in various option strategies, such as covered calls, protective puts and spreads. They are integral to both risk management and speculative activities in the market, providing opportunities for hedging, leverage and potential profit in different market conditions. Understanding in-the-money options is a key element in mastering the dynamics of option trading and implementing effective strategies.

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Related Investment Terms

At-the-Money (ATM) Option

Intrinsic Value

Out-of-the-Money (OTM) Option

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