What is in the money?
In the money (ITM) is defined by 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 means that an option on an underlying asset has gone beyond its strike price, giving it an intrinsic value of more than £0.
A call option is ITM when its exercise price is below the current price of the underlying asset, whereas a put option is ITM when its exercise price is above the current market price.
If the asset price has not gone beyond 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. Ideally, a trader always wants their option to be in the money at the time of expiry, otherwise it will expire worthless.
In the money means that the option has an intrinsic value, and that it can be exercised. However, just because an option is defined as in the money, does not mean that it will return a profit. An option costs money to buy, so it will only be considered profitable if the amount made on the trade exceeds the initial premium paid.
If an option is already ITM, then the premium can be higher. The premium of an option can also be higher if there is a greater chance that the option will soon be in the money, such as in periods of higher volatility or if the options has an expiry date much further in the future.