What is In The Money ?
779 reads · Last updated: December 5, 2024
The phrase in the money (ITM) refers to an option that possesses intrinsic value. An option that's in the money is an option that presents a profit opportunity due to the relationship between the strike price and the prevailing market price of the underlying asset.Due to the expenses (such as commissions) involved with options, an option that is ITM does not necessarily mean a trader will make a profit by exercising it.Options can also be at the money (ATM) and out of the money (OTM).
Definition
An in-the-money option is an option that has intrinsic value. This type of option presents a profit opportunity due to the relationship between the strike price and the current market price of the underlying asset. However, it's important to note that despite having intrinsic value, an in-the-money option does not necessarily guarantee a profit for the trader due to transaction costs such as commissions.
Origin
The history of options trading dates back to ancient Greece and Rome, but the development of modern options markets began in the 1970s. The establishment of the Chicago Board Options Exchange (CBOE) in 1973 marked the start of standardized options trading, and the concept of in-the-money options became widely applied.
Categories and Features
Options can be categorized based on their intrinsic value into in-the-money, at-the-money, and out-of-the-money options. In-the-money options are characterized by a strike price that is lower (for call options) or higher (for put options) than the market price of the underlying asset, thus having intrinsic value. At-the-money options have a strike price equal to the market price, while out-of-the-money options have a strike price higher (for call options) or lower (for put options) than the market price, thus lacking intrinsic value.
Case Studies
Case Study 1: Suppose Apple's (AAPL) stock is currently trading at $150, and an investor holds a call option with a strike price of $140. Since the strike price is below the market price, this option is in-the-money, allowing the investor to buy the stock at $140 and sell it at $150, thus making a profit. Case Study 2: Suppose Tesla's (TSLA) stock is currently trading at $700, and an investor holds a put option with a strike price of $750. Since the strike price is above the market price, this option is in-the-money, allowing the investor to sell the stock at $750 and buy it back at $700, thus making a profit.
Common Issues
Common issues investors face with in-the-money options include high transaction costs that may offset potential profits and market price fluctuations that can cause the option to lose its intrinsic value. Additionally, many investors mistakenly believe that all in-the-money options will yield profits, overlooking the impact of transaction costs.
