IN THE MONEY STOCK OPTIONS (ITM) - Options Trading Basics

Options which have a positive 'intrinsic value' are called in the money options. In case of a Call Option, the option is in the money if the strike price of the option is less than the current market price of the underlying. In case of Put Options, the option is in the money if the strike price of the Option is greater than the current market price of the underlying. The concept of in the money stock options is easy and is best understood by an example.

Example of In the Money Call and Put Option - Suppose you buy a Call Option on a stock whose current value is Rs. 500. The strike price of the Option is Rs. 480. This means the call option gives you, the buyer of the Option, the right to buy one market lot of the stock at the price Rs. 480. Note that if you were to exercise your Option immediately, you would gain Rs. 20 per stock. Thus the intrinsic value of this call option is Rs. 20. The stock option you have purchased is in the money.

On the other hand if you had purchased a put option on this stock with strike price of Rs. 550, then the intrinsic value of that put option would be Rs. (550-500) = Rs. 50. This put option would be in the money. On the other hand a put option on the same stock with a strike price of Rs. 450 would not be 'in the money' because exercising it would not result in any profit.

Some Characteristics of In the Money Options
The following characteristics of In-the-money Options are worth remembering.
  1. Deep in the Money Options - Options with very large intrinsic value are sometimes called deep in the money options. For a Call Option to be 'deep' in the money, the current price of the underlying has to be very large as compared to the strike price. For a put Option to be deep in the money the strike price has to be very large as compared to the current price of the underlying. Deep in the money options behave just like a future.
  2. In the money options have a higher value of delta, i.e. the variation of their price per unit variation in the price of the underlying is high. For options which are deep in the money, delta is close to 1.
There are three types of moneyness notions related to Options that an options trader must be aware of. In-the-money (ITM), At-the-money (ATM) and Out-of-the-money (OTM). If you are new to Options Trading, you might be interested in first reading my post on Options Examples.

Options Greeks

  • Option Greeks for Beginners (with free Options Calculator)
  • Option Greek Delta and Delta Neutral Options Trading Strategy
  • Option Greek Theta and its role in Options Trading Strategies
  • Option Greek Vega and implied volatility
  • Option Greek Rho - does it really matter in your Options Trading Strategies?
  • Stock Market Derivatives: Futures, Options

  • From Forward contract to Futures.
  • Stock Futures example - Futures trading basics explained.
  • Stock Options trading examples - Call Option Example and Put Option example.
  • Covered Call and Covered Put - Simplest Options trading strategy.
  • Volatility and Options Pricing - How is Option premium priced?
  • Lot Size of a Derivatives Contract - Contract Unit

  • Options Trading Basics
    In the Money Stock Options
    At the Money Stock Options
    Out of the Money Stock Options

    Jun 28, 2009

    Custom Search

      © 2008