What is an ITM Call Option? Get to Know Here!

4 mins read
by Angel One


Let us begin this blog by briefly understanding some important terms and concepts to be able to get a better grasp of the topic at hand: “what is ITM call option?’

Options give the buyer the opportunity of buying or selling the underlying security at the contract-stated strike price, by the specified expiration date. The strike price is the transaction value of the shares. Call options are purchased by investors as part of a bullish strategy with an expectation regarding the rise of the asset’s price and that it will close above the strike price before the expiration date of the option contract.

In The Money (ITM) is one of the classification terminologies of an options contract. The others being, Out Of The Money (OTM) and At The Money (ATM). This classification is beneficial for traders and investors in deciding which strike to trade during that specific market situation. Another important term worth introducing here is ‘Intrinsic Value’. Intrinsic Value is estimated by financial analysts to arrive at the worth of an asset-based on a certain underlying financial model. In the context of options trading, intrinsic value can be understood as the difference between the current price of an asset and the strike price of the option.

In The Money (ITM) Options

Having established a working understanding of the above-mentioned terms, we can now apply them in the context of ITM options of call and put and the associated intrinsic value. An ITM call option implies that the underlying security’s current market price is higher than the call option’s strike price and the option holder has the favorable opportunity to buy the security below its trading market price. On the other hand, an ITM put option means the asset’s current market price is below the strike price and it can be sold to book a profit.

What Is ITM Call Option?

As described in the earlier section, an ITM call option is when the call option’s strike price is lower than the underlying security’s current market price, giving it positive intrinsic value. This allows you to buy the security at a price that is lower than its actual current market price. This trading practise requires experience, knowledge, patience and timing to weather out the option’s contract expiration period so as to not diminish its extrinsic value by executing the trade too early. In The Money does not always imply a positive return or a profit. There are also the elements of premiums associated with stock options and the possible commissions or brokerage fees involved in executing the trade. The ITM call option requires the stock’s market price to rise high enough for the trader to cover the total expense (buying price, premium, commissions etc) and then the extra amount made is considered a profit. It is worth noting that ITM options are usually more expensive than other types of options. This is because the investors have to pay for the profit already associated with the option’s contract.

Footnote: In The Money put option works the opposite way to an ITM call option. An ITM put option is a bearish investment strategy in which the investors are allowed to sell the stock with the expectation that the actual market price will fall further below the strike price.

In Summation

To simplify, the golden rule of money classification is, if the intrinsic value is a positive number then the option is considered as being In The Money. The benefits of using ITM options for trading include the possibility of selling the stock at a profit when the current market price is higher than the strike price; in the case of the ITM call option. Similarly, you can hope to make a profit when the market price is below the strike price; in the case of the ITM out option. However, ITM options are known to be more expensive than other kinds of options. Also, you need to consider the associated premiums and commission/brokerage expenses to determine your eventual profitability by exercising an ITM option.

Most readers must already be aware that options trading can be extremely volatile and unpredictable, as the recent global events have repeatedly demonstrated. Geopolitical situations, natural disasters, global pandemics etc can cause significant market upheavals. This, in other words, implies that ITM options trading strategy is best suited to people with sufficient knowledge and experience in the market, and enough funds to exercise these options with. It also requires patience and self-discipline to time the trade perfectly right before the expiration date of the option’s contract to make the most out of your ITM call option. Small investors are well advised to sell their options well before the expiration rather than exercising them.