Warrior Trading Blog

In The Money Definition: Day Trading Terminology

In The Money

In the money is a term from options trading used to describe an option that would create value, but not necessarily profit, if exercised. It is not necessarily profitable because a trader needs to account for the premium spent to purchase the option, which being in the money has no bearing on.

It just means that you can exercise your option and receive shares for a better price than where it is currently trading.

A call option is in the money when the strike price is below the current market price of the security and a put option is in the money when the strike price is above the current market price of the security.

In the Money Example

Take a call option with a strike price of $40. Whenever the market price exceeds $40, the option is considered to be in the money. This is because the call option can be exercised, the security can be purchased from the counterparty to the option for $40 and then the security can be sold for more than $40 in the market, thereby creating value for the option holder.

Similarly in the case of a put option with the same strike price, it is considered to be in the money whenever the market price for the underlying security is below $40. When the option is exercised, the holder can buy a unit of the security for less than $40 from the market and then sell that security for $40 to the counterparty to the put option who is obligated to purchase it for $40.

Looking at the option chain above, you can see that this stock is trading around $67.50. Calls are on the left and Puts are on the right. So if the stock is trading at $67.50 then we know anything below that would be in the money for the Call side and anything above that would be in the money for the Put side (as you can tell with the lightly shaded gray denoting the in the money strike prices).

In the Money and Trading

In the money is a useful term for sorting options when searching through options chains and for discussing options when trading or conducting research. Terms like this allow options traders and other interested parties to more effectively communicate when dealing with options.

Final Thoughts

Shorthand terms such as in the money are important for day traders to understand so they can follow relevant discussions about options and more effectively navigate options research and options chains.