In the Money Option: Beginner’s Market Guide
Imagine holding a discount store voucher that grants you the right to buy a watch for ₹5,000 when the store price has already jumped to ₹7,000. That voucher holds real, immediate value because it gives you an advantage over current market prices.
In financial derivatives, an in the money option operates on that exact same principle—it represents an option contract that possesses positive intrinsic value because its strike price compares favorably against the current market price of the underlying asset.
Quick Takeaways
- Core Definition: An in the money option is a derivative contract whose strike price offers a favorable rate compared to the underlying asset’s current spot market price, giving the contract immediate intrinsic value.
- Primary Mechanism: A call option becomes ITM when the underlying spot price rises above its strike price, whereas a put option becomes ITM when the spot price drops below its strike price.
- Primary Risk / Limit: ITM options carry higher upfront premium costs, and SEBI statistical studies reveal that approximately 90% of individual retail traders in the equity F&O segment incur net financial losses.
What Is an In the Money Option?
An in the money option is an option contract that possesses positive intrinsic value because its strike price stands in a favorable position relative to the current spot price of the underlying stock or benchmark index.
On Indian exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), option contract pricing consists of two primary elements:
- Intrinsic Value: The real, measurable monetary profit built into the contract if it were exercised immediately at current market levels.
- Extrinsic Value (Time Value): The additional premium amount reflecting market volatility and the time remaining before the contract reaches its expiration date.
Understanding broad foundational derivative concepts, such as what is futures and options, helps beginner investors contextualize how option pricing operates across different market cycles.
Tips: ITM options contain both intrinsic value and time value, making them more expensive upfront than contracts with zero intrinsic value.
How Intrinsic Value Works in ITM Options
To evaluate an option’s pricing, traders calculate its intrinsic value using simple mathematical formulas based on the contract type:
Call Option Formula: Call Intrinsic Value = Current Spot Price – Strike Price
Put Option Formula: Put Intrinsic Value = Strike Price – Current Spot Price
If the formula yields a positive number, the contract is in the money and holds that exact amount in intrinsic value. If the calculation yields zero or a negative number, the contract has zero intrinsic value.
Warning: While intrinsic value provides a safety buffer, paying a high upfront premium means a rapid reversal in the underlying index can still lead to capital losses.
In the Money Call Option vs Put Option
The conditions for being in the money reverse depending on whether you are holding a call contract or a put contract.
In the Money Call Option
An in the money call option occurs when the underlying asset’s current spot price is higher than the option’s strike price. For instance, if Nifty 50 trades at 24,500, a Nifty 24,300 Call Option (CE) is ITM by 200 points. Traders often revisit what a call option means to master these directional relationships.
In the Money Put Option
An in the money put option occurs when the underlying asset’s current spot price is lower than the option’s strike price. For example, if Nifty 50 trades at 24,500, a Nifty 24,700 Put Option (PE) is ITM by 200 points. Investors frequently revisit what a put option means when exploring downside portfolio protection.
| Option Type | Nifty Spot Price | Strike Price | Moneyness State | Intrinsic Value |
|---|---|---|---|---|
| Call Option (CE) | 24,500 | 24,300 | In the Money (ITM) | 200 Points |
| Call Option (CE) | 24,500 | 24,700 | Out of the Money (OTM) | 0 Points |
| Put Option (PE) | 24,500 | 24,700 | In the Money (ITM) | 200 Points |
| Put Option (PE) | 24,500 | 24,300 | Out of the Money (OTM) | 0 Points |
ITM vs ATM vs OTM: Key Differences
Options contracts fall into three distinct moneyness classifications on exchange order books:
- In the Money (ITM): Contains real intrinsic value plus extrinsic time value. Moves more closely in tandem with the underlying stock price (higher Delta).
- At the Money (ATM): The strike price equals (or sits nearest to) the current spot price. Contains zero intrinsic value and consists entirely of time value.
- Out of the Money (OTM): Has zero intrinsic value. Premium pricing is cheaper but relies entirely on market movement before expiration to become profitable.
Market participants regularly track underlying index valuation metrics like the Nifty PE Ratio to gauge macro conditions when selecting option strike prices.
Expiry Settlement and Risks for Retail Traders on NSE
Understanding how ITM contracts behave at expiration is crucial for avoiding unexpected regulatory or capital obligations under Securities and Exchange Board of India (SEBI) regulations:
- Index Options Cash Settlement: Contracts on benchmark indexes (Nifty 50, Bank Nifty) automatically settle in cash upon expiration based on the final spot closing price.
- Stock Options Physical Delivery: Individual stock option contracts expiring in the money require mandatory physical delivery of underlying shares. Unhedged ITM stock option buyers must ensure sufficient account margins to take delivery or close positions prior to expiry.
Traders monitor broader market sentiment using third-party tools like Tickertape’s Market Mood Index (MMI) to manage exposure responsibly.
Conclusion
Mastering what defines an in the money option enables retail investors to navigate derivative market structures with greater precision. While ITM options require larger upfront premium capital, they offer higher price sensitivity (Delta) and a built-in intrinsic value buffer compared to OTM alternatives. Retail traders should prioritize disciplined risk management and position sizing before committing capital to active F&O positions.
Master derivative mechanics, strike selection, and risk management frameworks.
FAQs
An in the money call option is a contract whose strike price is lower than the current spot market price of the underlying asset, giving it positive intrinsic value.
An ITM option has intrinsic value; for example, if Nifty trades at 24,500, a 24,300 Call Option is ITM by 200 points because you can buy below current market rates.
An in the money put option is a contract whose strike price is higher than the current spot price of the underlying asset, allowing the holder to sell above market value.
ITM options offer higher Delta and built-in intrinsic value, reducing time decay impact, but they require significantly higher upfront capital (premiums) than OTM options.
On the NSE, ITM index options automatically settle in cash, whereas ITM individual stock options require physical delivery of underlying shares under SEBI rules.
ITM options possess positive intrinsic value plus time value, ATM options sit right at the spot price with zero intrinsic value, and OTM options consist strictly of time value.
Disclaimer: This article was written with the help of AI and reviewed by the Monetyra editorial team. It is for educational purposes only and should not be considered financial advice. Trading and investing in financial instruments involve significant risk of loss and are not suitable for all investors, and past performance of any strategy does not guarantee future results. Please consult a licensed financial advisor before making any investment or trading decision.
In India, equity trading and derivative exchange operations are regulated by SEBI. Readers are advised to verify contract specifications and margin guidelines on official exchange portals before trading.