In The Money
An option that currently has intrinsic value.
Also called: itm
Written by Javier Sánchez Ros
In plain language
A call is in the money when the underlying trades above the strike. A put is in the money when it trades below.
In-the-money options cost more but behave more like the underlying, with a higher delta and a lower proportion of decaying extrinsic value.
They also carry a higher probability of finishing profitable, which is exactly what the extra premium is paying for.
Worked through
A deep in-the-money call as a substitute for the shares
- Stock
- $104.00
- $85 call
- $20.10 — delta 0.92
- Capital for 100 shares
- $10,400
- Capital for the call
- $2,010
With a delta of 0.92 this contract moves almost one-for-one with the stock, so it behaves like owning 92 shares while tying up a fifth of the capital. Almost all of the premium is intrinsic value, which means very little of it is exposed to time decay.
That is the trade being made: giving up the explosive convexity of an out-of-the-money option in exchange for something that tracks the underlying reliably and does not need the move to happen by a particular date.
It is not free of the things that make options options. The $20.10 is still the maximum loss, and losing all of it requires the stock to fall below $85 — a 19% decline, unlikely but entirely possible, and a far larger loss than a stop on the shares would have produced.
The costs to weigh are the spread, which is wider than the stock’s, and the absence of dividends, which the shareholder receives and the option holder does not.
Why it matters
In-the-money options trade convexity for reliability. Less leverage, less decay, and outcomes far less dependent on precise timing.
Common mistakes
- Dismissing in-the-money options as expensive without comparing probability of profit.
- Forgetting that automatic exercise at expiration creates a stock position needing capital.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
An option with no intrinsic value, whose entire premium is time and volatility.
The portion of an option’s premium that would be realized if exercised right now.
How much an option’s price moves for a $1 move in the underlying.
The price at which an option contract can be exercised.
When an option seller is required to fulfill the contract’s obligation.