what does in the money mean
When trading options, one of
the terms that traders must be familiar with is "in the money" (ITM). An option is considered in the money when
its strike price is favorable compared to the current market price of the
underlying asset. In this article, we will explore in the money options in
detail.
Understanding
In The Money Options
In the money options are those
options whose strike price is already advantageous compared to the current
market price of the underlying asset. For call
options, an option is considered ITM
when the strike price is lower than the current
market price of the underlying asset. For put options, an option is
considered ITM when the strike price is higher than the current market price of
the underlying asset.
For example, let's assume that the current market price of a stock is $100, and a call option with a strike price of $90 is purchased. In this scenario, the call option is ITM because the strike price of $90 is lower than the current market price of $100. On the other hand, if a put option with a strike price of $110 is purchased, the option is ITM because the strike price of $110 is higher than the current market price of $100.
Benefits
of In The Money Options
One of the primary benefits of
in the money options is that they have intrinsic value. The intrinsic value of
an option is the difference between the current market price of the underlying
asset and the strike price. For example, if a call option has a strike price of
$90 and the current market price of the underlying asset is $100, the intrinsic
value of the option is $10.
Another benefit of ITM options
is that they provide a higher probability of profit. This is because the strike
price is already in a favorable position compared to the current market price
of the underlying asset. As a result, the option has a higher likelihood of
being exercised, allowing the trader to lock in a profit.
Risks
of In The Money Options
While in the money options
offer several benefits, they also carry risks that traders must be aware of.
One of the primary risks is that ITM
options tend to be more expensive compared to at the money or out of the
money options. This is because they have intrinsic value, which increases their
premium.
Additionally, ITM options are
not immune to changes in the market. Even though the option is already in a
favorable position, changes in the underlying asset's price can still affect
the option's profitability. As a result, traders must monitor the market and
manage their positions accordingly.
Conclusion
In the money options are a
powerful tool in the options trader's arsenal. They offer several benefits,
including intrinsic value and a higher probability of profit. However, they
also carry risks that traders must be aware of, such as higher premiums and
exposure to market changes. By understanding the concept of in the money options, traders can make
informed decisions and increase their potential for success in the options
market.