What it means
The phrase describes the relationship between an option's strike price, which is the price at which it lets you buy or sell, and the current market price of the underlying asset. If that relationship is favourable, the option is in the money; if it is unfavourable, the option is out of the money; and if the two prices are equal, it is at the money.
The amount by which an option is in the money is its intrinsic value. Everything else in the option's price is time value, which is what buyers pay for the possibility that the position improves before expiry, and which decays to nothing by the expiry date.
Being in the money is not the same as being profitable. An option that cost $9.20 and is $8.00 in the money would still leave the holder $1.20 per share down if exercised immediately, which is why traders distinguish between intrinsic value and break-even.
The concept applies well beyond traded options. Employee share options are described as in the money when the share price exceeds the exercise price, and underwater when it does not, which is why companies with fallen share prices sometimes reprice options to retain staff.
The status also drives behaviour at expiry. Options that finish in the money are typically exercised automatically by the broker, while those out of the money expire worthless, so someone holding a slightly in-the-money position needs to know whether an automatic exercise will land them with an unwanted share position or a margin call.
In practice
Real-world examples.
Example
A private investor holds call options on a retailer with a $40 strike after a strong trading update pushes the share to $47. The options are $7 in the money, and because expiry is a week away almost all of the remaining premium is intrinsic value with very little time value left.
Example
A software engineer holds employee share options with an exercise price of $12 while the company's shares trade at $31. Her options are deeply in the money, and she can see the paper gain of $19 per share even though she has not yet paid to exercise them.
Example
A commodity trader holds put options on wheat with a strike well above the current futures price after a bumper harvest. Those puts are firmly in the money, and the gain on them offsets the lower revenue the trader's physical crop will fetch.
Think of it
“In the money means the option has immediate value-it would be profitable to exercise now.
Formula
Calculation
Call intrinsic value = market price - strike price (never below zero). Put intrinsic value = strike price - market price (never below zero). Time value = option premium - intrinsic value.
Suppose a share trades at $58 and you hold a call option with a $50 strike, currently priced at $9.20 per share. The intrinsic value is $58 - $50 = $8.00 per share, so the option is $8.00 in the money, and because a standard contract covers 100 shares that is $800 of intrinsic value per contract.
The time value is $9.20 - $8.00 = $1.20 per share, or $120 per contract, and that is the portion that decays to zero by expiry. A put option with the same $50 strike on the same $58 share has an intrinsic value of $50 - $58, which is negative and therefore floored at zero, so that put is out of the money by $8.00.Case study
Seen in the real world.
Thornbury Optics is a fictional listed company used here as an illustrative case. Its head of engineering, Dan, held options over 20,000 shares at an exercise price of $12, granted when the shares traded around the same level.
Three years later the share price reached $31, putting the options $19 in the money, a paper gain of $380,000. Dan did nothing, partly because exercising would cost him $240,000 in cash and partly because he assumed the price would keep climbing. Over the following eighteen months a lost contract pushed the price back to $14.
In this illustrative example the options were still technically in the money, by $2 rather than $19, and the paper gain had fallen from $380,000 to $40,000. The point is not that Dan should have sold at the peak, which nobody can time, but that treating an in-the-money position as money already earned is a mistake: intrinsic value is a snapshot, not a balance.
Watch out
Common mistakes.
- Assuming an in-the-money option is automatically a profitable trade, when the premium paid still has to be recovered before the position breaks even.
- Confusing intrinsic value with the option's full price, when part of that price is time value that disappears by expiry.
- Letting a slightly in-the-money position run to expiry without checking whether the broker will exercise it automatically and hand over an unwanted share position.
Questions
People also ask.
What does out of the money mean?
It means exercising would produce no gain, so a call with a strike above the market price or a put with a strike below it, and such options have zero intrinsic value.
Are deep in-the-money options safer?
They behave more like the underlying share and carry less time value at risk, but they also cost far more upfront, so the amount of money exposed is larger.
What does underwater mean for employee options?
It means the share price sits below the exercise price, so the options have no intrinsic value and there is no reason to exercise them.
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