In the Money: Definition, Call & Put Options, and Example
So, what does it mean to be “in the money”? In simple terms, it means that the current price of the underlying asset is favorable for the option holder. For call options, being in the money means that the strike price is lower than the current market price of the underlying asset. On the other hand, for put options, being in the money means that the strike price is higher than the current market price.
Similarly, if you purchased a put option with a strike price of $50 on the same stock, and the stock is currently trading at $40, you are also “in the money”. This is because the stock price is lower than the strike price, allowing you to sell the stock at a higher price than its current market value.
| Term | Definition |
|---|---|
| In the Money | The state of an option when the current price of the underlying asset is favorable for the option holder. |
| Call Option | An option contract that gives the holder the right to buy the underlying asset at a specified price within a specific time period. |
| Put Option | An option contract that gives the holder the right to sell the underlying asset at a specified price within a specific time period. |
What Does “In the Money” Mean?
For call options, being “in the money” means that the strike price of the option is lower than the current market price of the underlying asset. This allows the option holder to buy the asset at a lower price and sell it at a higher market price, resulting in a profit.
On the other hand, for put options, being “in the money” means that the strike price of the option is higher than the current market price of the underlying asset. This allows the option holder to sell the asset at a higher price and then buy it back at a lower market price, again resulting in a profit.
Being “in the money” is a desirable situation for option holders as it indicates that their options have intrinsic value. Intrinsic value is the difference between the strike price and the current market price of the underlying asset. The higher the intrinsic value, the more profitable the option is.
It is important to note that being “in the money” does not guarantee a profit for the option holder. Other factors such as time decay, volatility, and transaction costs can still affect the overall profitability of the option. Therefore, option traders need to consider these factors and make informed decisions before exercising or selling their options.
Call and Put Options
On the other hand, a put option gives the holder the right to sell the underlying asset at the strike price before the expiration date. If the price of the underlying asset falls below the strike price, the put option is considered “in the money” and the holder can exercise the option to sell the asset at a higher price, thus making a profit.
In summary, call and put options are financial instruments that give the holder the right to buy or sell an underlying asset at a specified price within a certain period of time. When an option is “in the money,” it means that exercising the option would result in a profit for the holder.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.