The term “in the money” refers to an option that has intrinsic value. ITM signifies that an option has value at a strike price that’s lower than the current market value of the underlying asset.
If an option is in the money, that doesn’t guarantee the holder is earning a net profit.
What Are In The Money Call Options?
An in the money call option allows the investor to obtain securities at lower prices than the current market price. If the market price of a call option were above the strike price, it would be in the money (ITM).
The strike price is the transaction value for the shares of an underlying security.
What Happens When an Option Expires In The Money?
When an option expires in the money or profitable, the option will then be exercised. When call options expire ITM, investors end up spending more buying the shares than if they’d just purchased the stock.
The holder would also lose the commission that was paid to purchase the option and the amount that was spent for the premium cost for the option.
What Are Deep In The Money Call Options?
When a call option is deep in the money, that means that the strike price must be at least be $10 less than the underlying asset price.
What Is a Bear Call Spread?
A bear call spread is a two part option strategy where the investor will sell a call option in return for an upfront option premium. The investor at the same time would also purchase a second call option that has a higher strike price and an identical date of maturity.
With a bear call, the investor will be predicting that the price of the underlying security will plummet in the near future. In a bear call spread, pretty much the investor will purchase call options at a specific strike price and sell the same amount of call options that have lower strike prices, but still have the same expiration date in order to make a profit.
The net profit from a bear call spread strategy would be equal to the credit received.
What Is a Bull Call Spread?
A bull call spread consists of one long call with a lower strike price and one short call with a greater strike price. The underlying stock and expiration date would be the same for each of them in this strategy.
A bull call spread has a set net cost which would increase as the price of the underlying security rises.
What Are In The Money Put Options?
If the market price of the underlying security is less than the strike price of the put option, then it would be considered an in the money put option. Holders of ITM put options will often sell the underlying asset above the set market price in order to make a profit.
What Happens When an Option Expires Out of The Money?
When an option expires out of the money, nothing will happen. All the money from the option will be gone and it will be considered unprofitable.
What Is a Bear Put Spread?
With a bear put spread the investor is seeking to profit from a decline in the market price of a security and reduce the cost of holding the option. A bear put spread is achieved by acquiring put options and selling the same number of puts on the same asset, with identical expiration dates, but at a lower strike price to earn a profit.
The amount that could be made from a bear put spread would equal the difference between the two strike prices, minus the net cost of the options.
What Is a Bull Put Spread?
When an investor predicts a gradual increase in prices of an underlying asset, they’ll consider using a bull put spread to profit from this opportunity. This strategy involves using two put options to develop a range with a low and a high strike price.
The net profit from a bull put spread would equal the difference between the option and the two premiums.
What Is Intrinsic Value?
The intrinsic value of an asset is an indicator of how much the set asset is worth. Intrinsic value refers to an estimate of asset’s underlying value and if it could serve to be a good investment opportunity.
Intrinsic value is the difference between the option’s strike price, underlying security’s price, and when the option is in the money.
What Is Extrinsic Value?
Factors That Affect In-The-Money Options
Here is a list of the top factors that affect ITM options, see below for details.
The premium would be the market price of an option contract. It is the profit gained by the seller of an option contract with another set party.
The premium will go up as an option moves closer to being ITM. When an option is closer to being OTM the premium will then start to decrease.
A strike price is the fixed price at which, when executed, a derivative contract may be purchased or sold. The strike price is very important when determining the value of an option.
When a contract is first written, strike prices are established. It informs the investor of the price at which the underlying asset should get to, for the option to be in the money.
The maturity date is the date on which a fixed income instrument’s principal must be returned to the lender. The maturity date is the period by which a creditor must completely repay the set loan.
An underlying asset is used to describe the entity in an option contract that gives the contract its worth. Knowing the value of an underlying asset allows traders to identify suitable trades to make to maximize their potential returns.
What Is Moneyness?
Moneyness is the intrinsic value of an option as it currently stands. The term moneyness is used with call and put options.
It refers to whether an investor would make money if they exercised a specific option immediately.
What’s the Difference Between In The Money And Out The Money?
In the money refers to an option that has intrinsic value. The term “out of the money” (OTM) defines any option contract that only has extrinsic value and no intrinsic value.
For call options they would be considered OTM when it is trading below the strike price for the call. With put options they are OTM when the strike price is below the underlying price.
Financial Advisors Can Help You With Option Trading
The term in the money signifies that an option has value at a strike price that is lower than the current market value of the underlying asset. In the money call options can be utilized by investors to obtain securities at a lower price than the current market price.
With in the money put options, the market price of underlying securities will be less than the strike price. Financial advisors can help you trade options efficiently in order to improve your chances of making money from your investment.
Financial advisors will help you build a financial plan and teach you how to execute trades on the stock market. You should consult a financial advisor to help you engage in option trading.