In the Money Call

In the Money Put


Related Terms:


Definition of In the Money Call:

A call option is said to be in the money when the current market price of the stock is above the strike price of the call. It is in the money because the holder of the call has the right to buy the stock below its current market price. When you have the right to buy anything below the current market price, then that right has value. That value is also referred to as the options intrinsic value. That value is equal to at least the amount that your purchase price (strike price) is below the market price. In the world of call options, your call options are in the money when the strike price of your calls are less than the current market price of the stock. The amount that your call options strike price is below the current stock price is called its intrinsic value because you know it is worth at least that amount. This compares to an out of the money call option which is call option where the strike price of the call is above the stocks current market price.

Definition of In The Money Put:

A put option is said to be in the money when the strike price of the put is above the current price of the underlying stock. It is in the money because the holder of this put has the right to sell the stock above its current market price. When you have the right to sell anything above its current market price, then that right has value. That intrinsic value is equal to at least the amount that your strike price is above the market price. In the world of put options, your put option is in the money when the strike price of your put is above the current market price of the stock. The amount that your put options strike price is above the current stock price is called its intrinsic value because you know it is worth at least that amount.

Example of an In the Money CALL Option:

If the price of YHOO stock is at $37.75, then all calls with a strike price below $37.75 are examples of in the money calls.

Why are they in the money or ITM? They are ITM because those call options already have an intrinsic value. If you have the right to buy YHOO at $35 and the current market price is $37.75, then that YHOO $35 call is in the money $2.75. If you had that option and you had to exercise it, you could buy shares of YHOO at $35 and sell them immediately in the open market for $37.75 and pocket the $2.75 profit.

Likewise the YHOO $30 call is in the money $7.75 and the YHOO $25 call $12.75. This in the money value establishes a minimum or floor price for that option.

If YHOO is at $37.50, then all of the call options with a strike price of $38 and higher are out of the money.

Example of an In the Money PUT Option:

If the price of MSFT stock is at $37.50, then all of the puts with strike prices at $38 and above are in the money.

Why are they in the money? because those options already have an intrinsic value. If you have the right to sell MSFT at $40 and the current market price is $37.50, then that MSFT $40 put is in the money $2.50. If you had that option and you had to exercise it, you could sell shares of YHOO at $40 and buy them immediately in the open market for $37.50 and pocket the $2.50 profit.

Likewise the MSFT $45 put is in the money $7.50 and the MSFT $50 put is in the money $12.50. This value establishes a minimum or floor price for that option.

If MSFT is at $37.50, then all of the put options with a strike price of $37 and lower are out of the money.

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