In-The-Money Option

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In The Money Options (ITM Options)

What are In The Money Options? What Strike Prices are In the money and what is the effect?

Definition Of In The Money Options ( ITM Options )

A stock option which has intrinsic value.

Yes, a stock option is considered to be In The Money ( ITM ) if it contains intrinsic value, whether or not it still has extrinsic value.

In The Money Options ( ITM Options) Introduction

In The Money Options ( ITM Options ) is one of the three option moneyness states that all option traders has to be familar with before even thinking of actual option trading. The other two option status are : Out Of The Money ( OTM ) options and At The Money ( ATM ) options. Understanding how options are priced makes this topic easier to understand. In fact, trading In The Money Options ( ITM Options ) are what all option trading beginners should do as it is extremely effective at controlling risk while still providing a good reward / risk profile.

Any stock option contracts that can be exercised in order to buy its underlying stock for lower than the prevailing market price or to sell its underlying stock for higher than the prevailing market price is said to be In The Money ( ITM ).

When Is A Call Option In The Money ( ITM )?

A call option is considered In The Money ( ITM ) when the call option’s strike price is lower than the prevailing market price of the underlying stock, thus allowing its owner to buy the underlying stock at lower than the prevailing market price by exercising the call option.

In The Money Option with strike price extremely close to the strike price is also known as “Near The Money Option”.

Example : If GOOG is trading at $300, it’s $200 strike call options are In The Money ( ITM ) as it allows one to buy GOOG at $200 when it is trading at $300 now. The $200 strike call options therefore has an intrinsic value of $100.

Here is a table explaining the status of a call option against its underlying stock :

Assume GOOG trading at $300 now.
Call Option Status Strike Price
ITM $200
ATM $300
OTM $400

What Happens When A Call Option Expires In The Money ( ITM )?

When your Call Options expires In The Money ( ITM ), your In The Money call options will be automatically exercised if you have enough funds to buy the underlying stocks at the strike price you bought the call options.

In The Money Options Example

Assuming you bought QQQQ’s Jan44Call and then QQQQ closes at $46 upon option expiry.

Your Jan44Call gets automatically exercised and you buys QQQQ at $44 when it is currently trading at $46. You can then continue to hold the QQQQ stocks or sell it for the $2 profit.

If you do not have enough money in your trading account to buy (take delivery of) the underlying stock, then you should sell the In The Money Options ( ITM Options ) and take profit before the call options expires. Could you exercise the in the money call options, take delivery of the underlying stock and then immediately sell the stocks? Yes, you can do that but your profit would be exactly the same as when you simply sell the options (and you would have incurred a lot more commissions in the process of buying the stocks and selling the stocks).

Exercise vs Sell

Assuming you bought 1 contract of QQQQ’s Jan44Call for $1.20 and then QQQQ closes at $46 upon option expiry. QQQQ Jan44Call valued at $2 ($46 – $44).

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Scenario 1 : Exercise, Take Delivery, Sell

Step 1: Exercise, Take Delivery

Buys 100 shares of QQQQ for $4400 ($44 x 100). (Commission Incurred)

Step 2: Sell Shares At Current Price

Sells 100 shares of QQQQ at $46 for $4600 (Commission Incurred Again)

Profit = Profit From Share Sale – Premium Of Options Bought – Commissions

Profit = ($4600 – $4400) – ($120) – (2 x commission) = $80 – (2 x commission)

Scenario 2 : Sell Options

Sells 1 contract of QQQQ Jan44Call for $2

Profit = [(Difference in Strike – Premium) x (No. Of Contracts)] – Commissions

Profit = <[($46 - $44) - ($1.20)] x 100>– (1 x commission) = $80 – (1 x commission)

Do you see how you will receive the exact same amount of profit in both cases while you would have incurred more commission by taking delivery of the stock first in scenario 1? This is why options traders also sell in the money options and not exercise them unless for the express purpose of owning and holding the stock beyond expiration.

When Is A Put Option In The Money ( ITM )?

A put option is considered In The Money ( ITM ) when the put option’s strike price is higher than the prevailing market price of the underlying stock, thus allowing its owner to sell the underlying stock at higher than the prevailing market price by exercising the put option.

Example : If GOOG is trading at $300, it’s $400 strike put options are In The Money ( ITM ) as it allows one to sell GOOG at $400 when it is trading at $300 now. The $400 strike call options therefore has an intrinsic value of $100.

Here is a table explaining the status of a put option against its underlying stock :

Assume GOOG trading at $300 now.
Put Option Status Strike Price
OTM $200
ATM $300
ITM $400

What Happens When A Put Option Expires In The Money ( ITM )?

When your Put Options expires In The Money ( ITM ), your In The Money put options will be automatically assigned, and you will end up with short positions of the underlying stock.

Put Options Expiring In The Money

Assuming you bought QQQQ’s Jan44Put and then QQQQ drops to $42 upon option expiry.

Your Jan44Put gets automatically exercised and you will own short QQQQ at $44 when it is currently trading at $42. You can then continue to hold the short QQQQ stocks or buy it back for the $2 profit.

If you are not allowed to go short stocks or index by your broker, then you should sell the In The Money Options ( ITM Options ) and take profit before the Put options expires.

When Is An Option Deep In The Money (DIM)?

This is a relatively new term coined by the option trading community and refers to any options with delta value of more than 0.75. Deep In The Money options are used as fiduciaries for buying the underlying stock as they move almost dollar for dollar with the underlying stock while costing only a fraction of the price of the stock. In fact, LEAPs DIM options are now increasingly popular as a total replacement for buying the stock altogether. DIM options are also used in the famous Stock Replacement Strategy.

Advantages Of Trading In The Money Options ( ITM Options )

1. Higher Delta value than At The Money ( ATM ) options or Out of The Money ( OTM ) options. A higher delta value means that an In The Money Options ( ITM Options ) would gain more value than an At The Money ( ATM ) or Out Of The Money ( OTM ) option with the same move on the underlying stock.

Assume GOOG trading at $300 now.
Call Option Status Strike Price Delta Value Gain If GOOG is $301
OTM $400 0.2 $20
ATM $300 0.5 $50
ITM $200 0.8 $80

2. Lower risk of loss than Out Of The Money ( OTM ) options. Because In The Money Options ( ITM Options ) contains intrinsic value, you will still have the intrinsic value remaining by expiration if the underlying stock stayed stagnant while an Out Of The Money ( OTM ) option would expire completely worthless, losing all your money in it.

Assume GOOG trading at $300 now.
Call Option Status Strike Price Delta Value If GOOG is $301 GOOG expired at $300
OTM $400 0.2 $20 $0
ATM $300 0.5 $50 $0
ITM $200 0.8 $80 $100

Disadvantages Of In The Money Options ( ITM Options )

1. More expensive in absolute dollars than At The Money ( ATM ) or Out of The Money ( OTM ) options. Because In The Money Options ( ITM Options ) consists of intrinsic value, it would cost more per contract than an At The Money ( ATM ) or Out of The Money ( OTM ) option.

Assume GOOG trading at $300 now.
Call Option Status Strike Price Price Per Contract Delta Value If GOOG is $301 GOOG expired at $300
OTM $400 $0.10 x 100 = $10 0.2 $20 $0
ATM $300 $7.00 x 100 = $700 0.5 $50 $0
ITM $200 $101.00 x 100 = $10100 0.8 $80 $100

Beginner option traders need to remember that every stock options contract represents 100 shares of the underlying stock and therefore one would pay 100 times the asking price of a single option contract in order to open a position.

2. Lower percentage gain on the same move of the underlying stock than At The Money ( ATM ) or Out Of The Money ( OTM ) options.

In-The-Money Option

Add in-the-money option to one of your lists below, or create a new one.

In the Money and Out of the Money Options and Their Intrinsic Value

An option contract’s value fluctuates based on the price of the asset underlying it, such as a stock, exchange-traded fund, or futures contract. The option can be in the money (ITM), out of the money (OTM), or at the money (ATM). Each one of these situations affects the intrinsic value of the option.

The amount of time remaining before the option contract expires also plays a role in the value of the option, which in turn affects how high or low a price—the premium—the buyer is willing to pay for the option.

In the Money

If an option contract is ITM, it has intrinsic value. A call option—which gives the buyer the right but not the obligation to purchase an asset at a set price on or before a particular day—is in the money if the current price of the underlying asset is higher than that agreed-upon price, which is known as a strike price. The buyer could exercise their right under the option contract and buy the underlying asset for less than its current value. That means the call has intrinsic value.

Conversely, a put option—which gives the buyer the right to sell an asset at a set price on or before a particular day—is ITM if the price of the underlying security is lower than the strike price. The buyer could exercise their right under the option contract and sell the underlying asset for more than its current value. That means the put has intrinsic value.

In summary, a call option is a bet that the underlying asset will rise in price sometime before or on a particular day—known as the expiration date—while a put option is a wager that the underlying asset’s price will fall during that time period.

If the strike price of a call option is $5 and the underlying stock is currently trading at $6, the option is ITM. The higher above $5 the price goes, the more ITM the option is and the greater it’s intrinsic value.

If the strike price of a put option is $5 and the underlying stock is currently trading at $4, the option is ITM. The lower below $5 the price goes, the more ITM the option is and the greater it’s intrinsic value.

The intrinsic value of an option that’s ITM is the greater of the strike price or the price of the underlying asset minus the other price. Therefore, the intrinsic value for both the call and put options with the strike price of $5 is $1.

Out of the Money

If an option contract is OTM, it doesn’t have intrinsic value. A call option is OTM if the current price of the underlying asset is lower than the strike price. The buyer of the call option would not exercise their right under the option contract to buy the underlying asset because they would be paying more than its current value.

Conversely, a put option is OTM if the current price of the underlying security is higher than the strike price. The buyer of the put option would not exercise their right under the option contract to sell the underlying asset because they would be receiving less than its current value.

If the strike price of a call option is $5 and the underlying stock is currently trading at $4, the option is OTM. The lower below $5 the price goes, the more OTM the option is.

If the strike price of a put option is $5 and the underlying stock is currently trading at $6, the option is OTM. The higher above $5, the more OTM the option is.

Because these OTM put and call options can not be exercised for a profit, their intrinsic value is zero.

At the Money

If an option contract’s strike price is the same as the price of the underlying asset, the option is ATM. If the strike price of a call or put option is $5 and the underlying stock is currently trading at $5, the option is ATM. Because ATM put and call options can not be exercised for a profit, their intrinsic value is also zero.

Time Value

The value of an option consists of both intrinsic value and time value. The greater the amount of time until an option expires, the more time value it has. That’s because there is a greater chance the option will, at some point, become ITM over the longer time frame before expiration and so have intrinsic value.

When deciding how much of a premium they’re willing to pay, a prospective option buyer must take into consideration whether the underlying asset has or is likely to have intrinsic value and the option’s time value. An option can be OTM and consequently have no intrinsic value but still have time value up until its expiration. If an ITM option has $10 of intrinsic value, the premium should be higher than $10 because of the time value inherent in the amount of time the underlying asset has to become even more ITM.

IN THE MONEY

money, in the adj infml Now that we’re in the money we can afford this journey Сейчас, когда у нас есть деньги, мы можем поехать в это путешествие We’re in the money У нас опять завелась монета

adj infml Now that we’re in the money we can afford this journey — Сейчас, когда у нас есть деньги, мы можем поехать в это путешествие We’re in the money — У нас опять завелась монета

ситуация, при которой цена использования опциона выгоднее рыночной

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