In-the-Money
IntermediateAn option is in the money when exercising it immediately would be profitable: for a call, when the underlying price is above the strike price; for a put, when it is below.
An in-the-money option has intrinsic value. The further it is in the money, the more intrinsic value it has.
For example, if a share trades at 75, a call option with a strike price of 60 is in the money by 15. A put option with a strike price of 80 on the same share is in the money by 5.
In-the-money options are more expensive than at-the-money or out-of-the-money options, because their premium includes intrinsic value as well as time value. They also tend to move more closely with the price of the underlying asset. A deep in-the-money call might rise by nearly 1 for every 1 rise in the share price.
Being in the money does not necessarily mean the buyer has made a profit. The buyer also paid a premium. If you paid 18 for the call with a strike of 60, the share must rise above 78 for you to profit at expiry, even though the option is in the money at 75.
At expiry, options that are in the money by a small amount are often exercised automatically by the exchange.
For worked examples and full lessons, visit notesbysara.org.