# ITM – In the Money

## What is ITM?

The term “**In the Money**” (ITM), when applied to options, refers to an option that has an intrinsic value. Thus the option has a value as the strike price is favourable when compared with the current market price of the underlying asset.

- An in-the-money call option means the option holder is able to purchase the underlying asset below its current market price.
- An in-the-money put option means the option holder is able to sell the asset above its current market price.

Note that just because an option is ITM it doesn’t mean that it is profitable. The cost of buying the option (the premium) and any commissions or other fees must be taken into consideration.

## Option Moneyness

Moneyness is the term used to describe the state of an option. In the money is just one of three possible states, with the others being “At the Money” (ATM) and “Out of the Money” (OTM). Beginning option traders often think that ITM options are more expensive than ATM and OTM options because the price of an ITM option includes both time value and intrinsic value, while the others contain only time value. This is incorrect thinking however, because in the case where the underlying asset price remains constant the only cost for purchasing any option is the time value. At expiration an ITM option still has intrinsic value, while an ATM or OTM option would have no intrinsic value and would thus expire worthless.

## Why is an Option In the Money?

Any option, call or put, is considered to be In the Money when it has a positive intrinsic value. This means that if you exercise the option immediately, or if the price of the underlying asset remains unchanged until the expiration of the option, then exercising the option would result in a positive value i.e. a call option would allow you to buy the underlying asset below the current market price and a put option would allow you to sell the underlying asset at higher than the current market price. The moneyness of any option depends on the relationship between the price of the underlying asset and the strike price of the option. Moneyness works differently for calls and puts.

## ITM Call Options

A call option is considered to be in the money when it has a strike price that is lower than the current market price of the underlying asset. This means that if the option is exercised the trader is able to purchase the underlying asset for a price that is lower than the current market price. As an example, suppose you have a stock that’s trading at $50 a share. In this case any call option on this stock with a strike price lower than $50 (the $45 strike call, the $40 strike call, etc.) is considered to be in the money. This means you can exercise the option and save on the price of the stock compared with the open market price. At the same time any call options on this stock with a strike price that’s above $50 would be out of the money. Exercising these options wouldn’t make sense because there’s no benefit to it.

## ITM Put Options

Put options have exactly the opposite situation. A put option is in the money if the strike price of the option is higher than the current market price of the underlying asset. Using the example above with the stock at $50 a share and put options on that stock with strike prices above $50 would be in the money and exercising them would allow the trader to sell the underlying stock at a price that’s higher than the current market price.

## Deep In the Money Options

Any in the money option that is in the money by a huge amount is considered to be a Deep In the Money option. As an example, if the underlying asset were trading at $100, then a call with a $50 strike, or a put with a $150 strike would be considered as deep in the money.

## ITM Option Characteristics

Because they have both time value and intrinsic value in the money options are typically more expensive than out of the money options with the same expiration. And, the more that an option is in the money, the higher the premium for that option is.

In the money options are also more sensitive to changes in the price of the underlying asset when compared with out of the money options. And the more an option is in the money the faster its premium will change when the price of the underlying asset changes. This rate of change sensitivity is measured by the Greek letter delta. In the money call options have a delta that approaches +1. This means there’s a nearly 1:1 correlation between the price of the underlying asset and the premium paid for the option. So, every $1 increase in the price of the underlying asset yields an increase of nearly $1 in the option.

In the money put options have a delta approaching -1, which means the option premium falls as the price of the underlying asset rises. By contrast, out of the money options have a delta approaching zero, which means changes in the price of the underlying asset have almost no impact on the option premium. In general, in the money options have less liquidity versus at the money options. They have less trading volumes and a wider bid-ask spread, all other things being equal.

## Advantages of Trading ITM Options

- In the money options have a higher delta than ATM and OTM options, which means there’s a greater increase in value given the same move in the price of the underlying asset.
- The already included intrinsic value of in the money options gives them a lower risk of losses versus other moneyness options. Even if there is no change in the price of the underlying asset by expiration, an in the money option would retain an intrinsic value, while an OTM or ATM option would expire worthless, and the trader would lose all the premium paid for the option.

## Disadvantages of ITM Options

- In the money options are more expensive in dollar terms than other moneyness options because of the intrinsic value held in ITM options.
- ITM options have a smaller gain in percentage terms versus ATM and OTM options with the same price move in the underlying asset.