In-the-Money

In-the-Money (often abbreviated as ITM) is a term used in the world of options trading. An option is considered “in-the-money” if it has intrinsic value, meaning it would be profitable to exercise it immediately, not counting the initial cost (the premium) paid to acquire it. Think of it as the option having a built-in, on-paper gain. If a call option gives you the right to buy a stock at a certain price, it’s in-the-money when the stock's current market price is higher than that price. Conversely, if a put option gives you the right to sell a stock, it’s in-the-money when the stock’s current market price is below your selling price. Understanding this concept is the first step to navigating the powerful, and often tricky, landscape of options. It's the difference between an option that holds immediate value and one that is still waiting for its moment to shine.

The “moneyness” of an option is determined by a simple comparison between its strike price (the price at which the option can be exercised) and the current market price of the underlying asset (like a stock). The calculation differs slightly for calls and puts.

A call option is in-the-money when the underlying asset's price is higher than the strike price. The difference between the two is the option's intrinsic value.

• Example: Imagine you buy a call option for Company XYZ with a strike price of €50. If XYZ stock is currently trading on the market at €55, your option is €5 in-the-money (€55 market price - €50 strike price). You have the right to buy at €50 a stock that everyone else has to pay €55 for. That's a valuable position to be in!

A put option is in-the-money when the underlying asset's price is lower than the strike price. It’s the mirror image of a call option.

• Example: Let's say you buy a put option for Company XYZ, also with a strike price of €50. If the stock tumbles and is now trading at €42, your option is €8 in-the-money (€50 strike price - €42 market price). You have the right to sell at €50 a stock that is currently only worth €42 on the open market.

While options can be speculative, a savvy value investor can use them strategically. Understanding “moneyness” is key.

This is a critical distinction that trips up many beginners. An option being in-the-money does not automatically mean you’ve made a profit. You must always account for the premium you paid for the option. Your actual profit is calculated only after you've cleared this initial cost. The point where you cover the premium is known as the breakeven point.

• Example Revisited: Your call option is €5 in-the-money. But if you paid a €6 premium for it, exercising it would still result in a €1 net loss (€5 intrinsic value - €6 premium). You need the stock to rise above €56 to start making a real profit.

“In-the-money” is one of three possible states for an option. The other two are:

• At-the-Money (ATM): The strike price is essentially equal to the current market price. The option has no intrinsic value.
• Out-of-the-Money (OTM): The opposite of ITM. An OTM option has no intrinsic value and would result in a loss if exercised. For a call, the stock price is below the strike price. For a put, the stock price is above the strike price.

Value investors typically focus on owning great businesses for the long term, not short-term speculation. However, options can be a useful tool. For instance, an investor confident in a company's long-term value might buy a deep in-the-money call option. This provides leverage, allowing them to control a larger number of shares for a smaller capital outlay than buying the shares outright. Another common strategy is selling covered calls on stocks already in the portfolio. This involves selling a call option (usually at-the-money or slightly out-of-the-money) to generate extra income from the holding. In every case, a firm grasp of whether an option is in-the-money, at-the-money, or out-of-the-money is fundamental to making sound, value-driven decisions.