In-the-money

Understanding 'In-the-money' in Trading

In the world of trading, the term 'In-the-money' plays a pivotal role in understanding the value of an option contract. You come across this phrase when dealing with both call and put options. So, if you are novice trader or simply dipping your toes in the financial market, get ready to dive into the meaning and significance of this pivotal trading term.

Defining 'In-the-money'

'In-the-money' (ITM) is a term used to describe an option that has intrinsic value. In other words, if you, as an option holder, were to exercise the option right now, it would yield a profit. We term the option as 'in-the-money' because it's value has reached a profitable level in regard to the price of the underlying asset.

In-The-money and Call Options

In the context of a call option(the right to buy), an option is 'in-the-money' if the price of the underlying asset in the market, known as the 'spot price', is higher than the predetermined 'strike price'. In simpler terms, if you have the ability to purchase something for less than what it is currently being sold for in the market, your call option is 'in-the-money'.

In-The-money and Put Options

On the other hand, a put option (the right to sell) is considered 'in-the-money' when the spot price of the underlying asset is lower than the strike price. To break it down, if you can sell something for a higher price than the current market value, you hold an in-the-money put option.

Final Thoughts on 'In-the-money'

Understanding the term 'In-the-money' can give you an edge in trading. It helps in analyzing the worth of an option before making a trade. Keep in mind that just because an option is 'in-the-money', it does not imply a guaranteed profit since other factors like transaction cost and taxes can affect the final outcome. 'In-the-money' is not a profit prediction but aids in informing a potential trading decision.