If you are interested in trading options, you may come across various terms relating to in-the-money options. In this article, you will find out what "in the money" means, whether these options are always associated with profit and how other terms can be distinguished from it.
Definition of In the Money
The term In the Money is related to Optionsa specific form of financial instrument. Holders of options have the right, but not the obligation, to buy or sell the underlying asset at a predetermined time.
There are a few terms that the so-called Moneyness or also Proximity to money of an option. This includes the term "in the money". In the case of a call option, this means that the price of the underlying asset is above the strike. In the case of a put option, the price of the underlying asset has fallen below the strike.
The option has a intrinsic value. The intrinsic value is the difference between the current price of the underlying asset and the strike price. If the expiry date of the option were imminent, it would therefore be worthwhile exercising the option.
In addition, there are two other important near-the-money terms that you should be aware of if you are interested in trading options:
- At the MoneyCurrent price and strike price are the same. This is a special feature, as the difference between the current price and the strike price is zero. Accordingly, the underlying has no intrinsic value.
- Out of the MoneyIf it is a put option, the strike is below the current price of the underlying asset. If it is a call option, on the other hand, the strike is above the current price.
In the Money Option example
For a better understanding, a concrete example of an in-the-money option will be discussed. This is based on a Call option assumed. The Exercise price at 35 euros and the Price of the underlying Share at 40 euros.
This is an in-the-money option, since the Price of the underlying above the strike lies. Accordingly, a difference can be calculated and the option has an intrinsic value.
If, in addition to the intrinsic value, the so-called Current value is taken into account, investors can increase the value of the Premium an option receive. If you want to buy an in-the-money option as an investor, you pay a higher premium than for a possible option without intrinsic value.
Is In the Money always associated with profit?
If it is an In the Money option, the not synonymous with making a profit. This information merely indicates that there is an intrinsic value because the current price of the underlying has developed favorably.
Whether or not a profit can actually be made with such an option depends on various aspects, such as the amount of the premium paid:
- In principle, a call option can be said to be profitable if the difference between the price of the underlying asset and the strike exceeds the total costs
- The total costs can be calculated taking into account the payment of the premium and all transaction costs
Deep In the Money
The description Deep in the Money is used when options are a high Delta have a delta. In the case of call options, these are deep in the money if the delta is between 0.8 and 1. This means that the gap between the price of the underlying asset and the strike price is large.
In the case of put options, options are considered to be deep in the money if the delta is between -0.8 and -1. The prices of such options usually move in the same way as the price of the underlying asset.
Conclusion: This is what In the Money means
Moneyness terms describe the Cash proximity of options. An important term here is In the Money. This refers to put options where the price of the underlying falls below the strike. In the case of call options, this means that the price of the underlying is above the strike.
Unlike at-the-money options, where the current price and strike are the same, in-the-money options have an intrinsic value. However, this does not mean that every in-the-money option is associated with an actual profit. For this, the Total costsin particular the paid Premiummust be taken into account.
For example, a call option is in the money if the strike price is EUR 35 and the price of the corresponding share is EUR 40.