In the money definition

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In the money is a term that describes an option’s state of ‘moneyness’ – the underlying asset’s status when compared to the price at which it can be bought or sold (its strike price).

Specifically, in the money refers to an option with an underlying asset that has gone beyond its strike price. For calls (options that rely on the underlying asset increasing in price), that means that asset’s price has gone above the strike price. For puts (options that instead rely on the underlying asset decreasing in price), it means that the asset’s price has dropped below the strike price.

If the asset price has not gone beyond (above it in the case of a call, or below in the case of a put) the strike price, it is referred to as out of the money. If it is equal to the strike price, it is at the money.

An option that is in the money can be exercised. It will only return a profit, though, if the amount made on the trade exceeds the initial premium paid.

In the money example

You believe that BHP’s share price is on the way up from its current value of $18, so you buy a call option with a strike price of $20. If Vodafone shares hit $21, you are in the money: but unless the cost of the call was less than $1, the trade will still incur a loss.

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