In the Money Options Explained: What ITM Means for Calls and Puts

Understanding options that are in the money (ITM) is fundamental to grasping how these derivatives work. Whether you are new to options or revisiting the basics, knowing what ITM status means for calls and puts helps you interpret pricing and evaluate potential outcomes more clearly.

This guide breaks down the concept of ITM options, explains how it differs between calls and puts and places moneyness in the broader context you need for informed decision-making.

What does ‘in the money’ mean in options trading?

An option is considered in the money when exercising it would result in a positive payoff (before considering the premium and costs) based on the current underlying asset price. Put simply, the option has immediate economic value before considering the premium paid.

For a call option, ITM means the underlying asset trades above the strike price. For a put option, ITM means the underlying trades below the strike price. This distinction matters because it determines whether the option holds intrinsic value at any given moment.

The term moneyness describes where an option sits relative to the current market price of its underlying asset. It is a snapshot, not a prediction. An option can move in and out of the money multiple times before expiration.

Intrinsic value and why it matters

Intrinsic value is the portion of an option’s price that reflects its ITM amount. It equals the difference between the strike price and the current price of the underlying asset, but only when that difference favours the option holder.

If a call option has a strike price of 100 and the underlying trades at 110, the intrinsic value is 10. If the underlying traded at 95 instead, the intrinsic value would be zero because the option is not in the money.

Intrinsic value cannot be negative. When an option is out of the money (OTM), its intrinsic value is simply zero. Any remaining value in the premium comes from time value, which reflects the possibility that the option could become profitable before expiration.

Understanding intrinsic value helps you see what portion of the premium you pay represents current economic worth versus speculative potential.

In the money call options

An ITM call option gives the holder the right to buy the underlying asset at a price lower than its current market value. This creates immediate theoretical value if the option were exercised today.

ITM call options typically carry higher premiums than OTM calls because they already possess intrinsic value. The deeper ITM a call is, the more its price movement tends to track the underlying asset.

Traders sometimes describe deep ITM calls as behaving somewhat like the underlying asset itself, though this comparison has limits. The option still has an expiration date and carries time decay, which the underlying does not.

ITM call option example

Consider this hypothetical scenario for illustration only.

Suppose shares of Company XYZ trade at 150. You hold a call option with a strike price of 140. The option is in the money by 10 because you could theoretically buy at 140 and sell at the current market price of 150.

Of the 13 total premium, 10 is the intrinsic value. The remaining 3 is time value, which will erode as expiration approaches. If the underlying dropped to 140 or below, the intrinsic value would disappear entirely.

In the money put options

An ITM put option gives the holder the right to sell the underlying asset at a price higher than its current market value. This is the mirror image of a call.

When the underlying falls below the strike price, the put gains intrinsic value. The lower the underlying goes relative to the strike, the deeper ITM the put becomes.

ITM puts carry higher premiums than OTM puts for the same reason ITM calls do. They already contain tangible value rather than relying entirely on future price movement.

ITM put option example

Using another hypothetical scenario for illustration.

Imagine shares of Company ABC trade at 80. You hold a put option with a strike price of 95. The put is in the money by 15 because you could theoretically sell at 95 when the market price is only 80.

Here, 15 of the premium is intrinsic value. If ABC’s price rose to 95 or above, the put would no longer be in the money, and its intrinsic value would fall to zero.

ITM vs ATM vs OTM: Understanding option moneyness

Option moneyness falls into three categories. Understanding all three helps you interpret options pricing and behaviour.

Moneyness comparison

ATM options sit at the boundary. They often (but not always) carry high time value because small price movements can push them ITM.

OTM options have no intrinsic value. Their entire premium consists of time value and reflects the probability of becoming profitable before expiration.

The relationship between moneyness and premium is not linear. Factors such as volatility, time to expiration and interest rates also influence pricing through what options traders call extrinsic or time value. Technically, these two terms are not always interchangeable, however; the remainder of the premium is extrinsic value, which includes both time value and implied volatility.

Why traders consider in the money options

Some market participants prefer ITM options for specific reasons, though no approach suits everyone.

ITM options tend to have higher delta values, meaning their prices respond more directly to movements in the underlying asset. This can appeal to those who want exposure that tracks the underlying more closely.

Because ITM options already contain intrinsic value, they may be less sensitive to time decay than equivalent ATM options. Time decay still occurs, but it represents a smaller proportion of the total premium.

ITM options also typically have lower break-even thresholds for the underlying. The asset does not need to move as far for the position to retain value at expiration compared to OTM alternatives.

These characteristics involve trade-offs. Higher premiums mean larger capital outlay and greater absolute loss potential if the position moves against you.

Key risks and considerations

Options are complex instruments. Several risks apply regardless of whether an option is in the money.

Time decay works against option buyers. Every day that passes erodes time value, even if the underlying price stays constant. This erosion accelerates as expiration approaches.

ITM status at any point before expiration does not guarantee profit. The underlying can reverse direction. A deep ITM option can become worthless if the market moves sufficiently against you.

Liquidity varies. Some ITM options have wide bid-ask spreads, increasing transaction costs. This is particularly relevant for options on less actively traded underlyings.

At expiration, ITM options may be automatically exercised depending on your broker and the specific contract terms. This can result in acquiring or selling the underlying asset, which has its own implications. Automatic exercise may create a share position and related funding, margin and settlement obligations. Check your broker’s policies regarding automatic exercise.

If you are uncertain whether options trading is appropriate for your circumstances, consider seeking guidance from a qualified financial adviser.

Summary

In the money options have intrinsic value because their strike price compares favourably to the current market price of the underlying asset. For calls, ITM means the underlying trades above the strike. For puts, ITM means the underlying trades below the strike.

Intrinsic value represents the tangible worth an option holds if exercised immediately. Time value accounts for the remainder of the premium and reflects potential future price movement.

ITM, ATM and OTM describe where an option sits on the moneyness spectrum. Each category has different characteristics regarding premium, delta and sensitivity to various market factors.

Options remain complex instruments with material risks, including the potential loss of your entire premium. Understanding moneyness is one piece of a much larger picture. Before trading options, ensure you understand how they work, the specific risks involved and whether they align with your financial situation and objectives.

Sources:

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https://www.heygotrade.com/en/blog/intrinsic-value-in-options-trading/

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