In the Money (ITM)
Definition and implications of in-the-money options
What Does In the Money Mean?
In the money (ITM) means an option has intrinsic value. For a call, ITM means the current share price is above the strike. For example, if a call has a strike of 100 and the stock trades at 105, the option is ITM by 5. For a put, ITM means the current price is below the strike. If a put has a strike of 100 and the stock trades at 95, the put is ITM by 5. The amount by which an option is ITM is called its intrinsic value. An ITM call carries the right to buy below the market price, which has value. An ITM put carries the right to sell above the market price, which likewise has value. Most traders regard ITM options as more valuable and less risky than OTM options, though that is not always true in terms of potential return.
Characteristics of ITM Options
ITM options typically have higher deltas than OTM options. A deep ITM call might have a delta of 0.80 or more, meaning it moves nearly dollar for dollar with the stock. ITM options have intrinsic value that increases directly with price movement. If the option strike is 100 and price rises from 105 to 106, a deep ITM option gains roughly a full point of value. ITM options tend to carry less time value as a percentage of their total price, because most of that price is intrinsic. An ITM option has a higher probability of finishing ITM at expiration. A 100-strike call with the stock at 105 has a high probability of finishing ITM, but not a guaranteed one: a fall of more than 5 points is enough to wipe out its entire intrinsic value. ITM options also carry a greater probability of early assignment in the case of American-style options.
Advantages of ITM Options
Buyers often prefer ITM options because they have a higher probability of being profitable. The hurdle to breakeven is lower. If you buy a 100-strike ITM call for 3.00 when the stock is at 103, the breakeven is 103 — exactly where the stock already trades. A 105-strike OTM call bought at 1.00 would need the stock to reach 106 before it started making money. That difference is what makes profitability easier to reach with an ITM option. ITM options behave more like shares, which feels familiar to anyone used to trading stock. Option sellers typically do NOT want to sell ITM options because of the greater risk of early assignment. If you sell an ITM call on a dividend-paying stock, you can be assigned before expiration so the holder can capture the dividend. ITM buyers also hesitate less, because they already hold an unrealised gain, which takes some of the emotional strain out of holding the position open.
Disadvantages of ITM Options
The upfront cost of an ITM option is far higher than an OTM option, because much of its value is intrinsic. A trader with limited capital can afford fewer ITM contracts. The potential return in percentage terms is smaller. If you buy an ITM call for 5.00, the stock has to rise a long way for you to double your money. A cheaper OTM option might easily triple in price on the same stock move. ITM options carry less time value, so their theta decays more slowly. That matters less to buyers, but if you are selling ITM options the decay works in your favour more slowly. ITM options are also less sensitive to changes in implied volatility than ATM options: vega peaks at the money and falls away as an option moves deeper in or further out. Most of a deep ITM call’s price is intrinsic value, and intrinsic value does not depend on implied volatility.
ITM vs OTM Strategies
Choosing between ITM and OTM depends on your objective. If you want a high probability of a gain and are willing to accept a lower percentage return, buy ITM. If you want high return potential and can tolerate more risk, buy OTM. For sellers, selling OTM options that will probably expire worthless is more lucrative. Vertical spreads combine the two: they buy the leg nearer the money and sell the one further OTM. ITM options are more commonly used by conservative traders and institutional investors. OTM options are more popular among speculative traders. Experienced professionals move between the two depending on their view and the market environment. A bullish trader might buy ITM if they believe the move higher is very likely, or OTM if they think it is possible but not probable.