In the money (ITM) - in money

derivatives

In the money (ITM) or in money is the name of a financial option that has intrinsic value. For example, in the case of a call option, if the spot price of the underlying asset is higher than the option strike price. In the case of a put option, the price of the underlying asset must be below the exercise price.

In the case of a call ITM option:

Underlying price> Strike price + premium

In the case of the ITM put option:

Underlying price <strike price - premium

The other possibilities are that:

  • The option is out of the money (OTM): The option has no intrinsic value.
  • The option is at money (ATM): The strike price is equal to the underlying price.

Example of a money option

Let's look at some examples of ITM options:

  1. Call option on BBVA

As of 07/16/10, the BBVA share price is € 8.67. An investor thinks that the title could rise during the last quarter of 2010. However, the uncertainties are very great and he decides not to risk buying the shares in cash.

Consequently, it decides to buy 100 contracts of a call option on the bank BBVA with expiration on 12/17/10 and a strike price of € 10.50. You pay a premium of 0.70 basis points for each contract. We will assume that you hold your position in options until the expiration date of the contract.

As in futures contracts, the nominal value of each option contract is 100 shares. Therefore, the buyer pays the seller a premium amount of € 7,000 (100 x 0.70 x 100) for the right to buy 10,000 BBVA shares (100 contracts x nominal of 100 securities) at € 10.50, up to the due date.

The risk of the buyer of the call options is limited to € 7,000.
The risk of the seller of the call options is unlimited.

To determine the break-even of the operation or level from which the buyer of the option contracts makes a profit, we have to add the premium paid to the exercise price of the option:

BE = € 10.50 + € 0.70 = € 11.20

From € 11.20 per 1 BBVA share, the buyer wins.

  • ITM case: The BBVA price is higher than € 11.20. Let's assume € 12.20.

The call option is exercisable at € 10.50. The buyer of the call options exercises his right to purchase 10,000 shares at € 10.50 and sells them on the market at € 12.20. In the sale you earn € 17,000 ((€ 12.20 - € 10.50) x 10,000 shares. However, having paid € 7,000 in premiums, the net profit of the operation is € 10,000 (€ 17,000 - € 7,000) .

In contrast, the seller of the call options buys the shares at € 12.20 to deliver them at € 10.50 to the buyer of the call options. You lose € 17,000 in the sale ((€ 10.50 - € 12.20) x 10,0000 shares). He has received € 7,000 in premiums. The net loss amounts to € 10,000 (€ 17,000 - € 7,000).

2. Put option on the Yahoo stock

As of 07/16/10, Yahoo's stock is trading at $ 14.90. An investor thinks that it is overvalued and therefore should go down in the next few months. However, it does not want to position itself short by selling securities short, for fear of new measures of expansionary monetary policy that could cause a bullish section of the stock indices. Therefore, you decide to buy 100 put option contracts with expiration 10/15/10 and a strike price of $ 13. You pay a premium of 0.29 basis points for each contract.

As in futures contracts, the face of each option contract is 100 titles. The buyer of the put options pays the seller a premium of $ 2,900 (100 x 0.29 x 100), for the right to sell him 10,000 Yahoo titles (100 contracts x 100 nominal) at a price of $ 13 , until 10/15/10. We will assume that the option position is held until the option expires.

The buyer's risk of put options is limited to $ 2,900.
The seller's risk in the event of a drop in the share price is unlimited.

To determine the break-even of the operation or level from which the buyer of the put makes a profit, we have to subtract the premium paid from the strike price:
13 $ – 0,29 $ = 12,71 $

When the Yahoo stock falls below $ 12.71, the buyer of the put options profits.

  • ITM Assumption: Yahoo's price is below $ 12.71. Suppose $ 10.

The option is exercisable.

The buyer exercises his right to sell and deliver to the seller of the put options, 10,000 Yahoo shares at $ 13, which he buys on the market at $ 10. Earn $ 30,000 in the sale of securities (($ 13 - $ 10) x 10,000). Discounting the amount of the premiums paid, the operation is settled with a profit of $ 27,100 ($ 30,000 - $ 2,900) The seller receives 10,000 Yahoo titles at $ 13 that he sells in the cash market for $ 10. You lose $ 30,000 on the stock trade (($ 10 - $ 13) x 10,000). Discounting the amount of premiums you have collected, you lose $ 27,100 ($ 30,000 - $ 2,900).

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