What does ‘In The Money’ mean?
In the money means that a call option’s strike price is below the market price of the underlying asset or that the strike price of a put option is above the market price of the underlying asset. Being in the money does not mean you will profit, it just means the option is worth exercising. This is because the option costs money to buy.
BREAKING DOWN ‘In The Money’
In the money means that your stock option is worth money and you can turn around and sell or exercise it. For example, if John buys a call option on ABC stock with a strike price of $12, and the price of the stock is sitting at $15, the option is considered to be in the money. This is because the option gives John the right to buy the stock for $12 but he could immediately sell the stock for $15, a gain of $3. If John paid $3.50 for the call, then he wouldn’t actually profit from the total trade, but it is still considered in the money.
How Call Options and Put Options Work
Options confer the buyer the right, but not the obligation, of buying or selling a security at a certain price, known as the strike price, before a certain date, known as the expiration date. Traders purchase call options, which give them the right to buy, when they expect the market price of the security to increase. They purchase put options, which enable them to sell, when they expect the value of the security to decrease.
Options have intrinsic value when the strike price is lower, in the case of a call option, or higher, in the case of the put option, than the security’s market price. The buyer can exercise the call or put and profit on the difference.
In the Money, At the Money, and Out of the Money
Options are classified in three ways depending on the relationship of the strike price to the security’s market price. In the money means the strike price is lower, in the case of a call, or higher, in the case of a put, than the market price. At the money means the strike price and market price are the same.
The amount of the premium paid for an option depends in large part on whether the option is in the money, at the money or out of the money. Because they have intrinsic value, in the money options are the most expensive. Out of the money options, which require a price movement to become valuable, cost much less.