What does “in-the-money” (ITM) mean in trading?

An ITM option already has intrinsic value, meaning the strike price is favourable compared to the current market price of the underlying asset.

Why do traders choose ITM options instead of OTM?

ITM options offer a higher probability of profit and move more closely with the underlying asset, though they require a larger upfront premium.

Can ITM options be used for hedging?

Yes. ITM puts are often used to protect long positions in forex or commodities, providing more immediate downside protection than OTM puts.

Are ITM options suitable for beginners?

They can be. ITM options reduce the risk of expiring worthless, which can make them more comfortable for newer traders learning to manage risk.

How can I practise trading ITM options with AvaTrade?

You can open a free demo account with AvaTrade to explore ITM strategies in forex and commodities before moving to a real trading account.

What is ITM?

Market Terms

Advanced • 13 min

The term “In the Money” (ITM), when applied to options, refers to an option that has an intrinsic value. Thus the option has a value as the strike price is favourable when compared with the current market price of the underlying asset.

An in-the-money call option means the option holder is able to purchase the underlying asset below its current market price.
An in-the-money put option means the option holder is able to sell the asset above its current market price.

Note that just because an option is ITM it doesn’t mean that it is profitable. The cost of buying the option (the premium) and any commissions or other fees must be taken into consideration.

Option Moneyness

Moneyness is the term used to describe the state of an option. In the money is just one of three possible states, with the others being “At the Money” (ATM) and “Out of the Money” (OTM). Beginning option traders often think that ITM options are more expensive than ATM and OTM options because the price of an ITM option includes both time value and intrinsic value, while the others contain only time value. This is incorrect thinking however, because in the case where the underlying asset price remains constant the only cost for purchasing any option is the time value. At expiration an ITM option still has intrinsic value, while an ATM or OTM option would have no intrinsic value and would thus expire worthless.

Why is an Option In the Money?

Any option, call or put, is considered to be In the Money when it has a positive intrinsic value. This means that if you exercise the option immediately, or if the price of the underlying asset remains unchanged until the expiration of the option, then exercising the option would result in a positive value i.e. a call option would allow you to buy the underlying asset below the current market price and a put option would allow you to sell the underlying asset at higher than the current market price. The moneyness of any option depends on the relationship between the price of the underlying asset and the strike price of the option. Moneyness works differently for calls and puts.

ITM Call Options

A call option is considered to be in the money when it has a strike price that is lower than the current market price of the underlying asset. This means that if the option is exercised the trader is able to purchase the underlying asset for a price that is lower than the current market price. As an example, suppose you have a stock that’s trading at $50 a share. In this case any call option on this stock with a strike price lower than $50 (the $45 strike call, the $40 strike call, etc.) is considered to be in the money. This means you can exercise the option and save on the price of the stock compared with the open market price. At the same time any call options on this stock with a strike price that’s above $50 would be out of the money. Exercising these options wouldn’t make sense because there’s no benefit to it.

ITM Put Options

Put options have exactly the opposite situation. A put option is in the money if the strike price of the option is higher than the current market price of the underlying asset. Using the example above with the stock at $50 a share and put options on that stock with strike prices above $50 would be in the money and exercising them would allow the trader to sell the underlying stock at a price that’s higher than the current market price.

Deep In the Money Options

Any in the money option that is in the money by a huge amount is considered to be a Deep In the Money option. As an example, if the underlying asset were trading at $100, then a call with a $50 strike, or a put with a $150 strike would be considered as deep in the money.

ITM Option Characteristics

Because they have both time value and intrinsic value in the money options are typically more expensive than out of the money options with the same expiration. And, the more that an option is in the money, the higher the premium for that option is.

In the money options are also more sensitive to changes in the price of the underlying asset when compared with out of the money options. And the more an option is in the money the faster its premium will change when the price of the underlying asset changes. This rate of change sensitivity is measured by the Greek letter delta. In the money call options have a delta that approaches +1. This means there’s a nearly 1:1 correlation between the price of the underlying asset and the premium paid for the option. So, every $1 increase in the price of the underlying asset yields an increase of nearly $1 in the option.

In the money put options have a delta approaching -1, which means the option premium falls as the price of the underlying asset rises. By contrast, out of the money options have a delta approaching zero, which means changes in the price of the underlying asset have almost no impact on the option premium. In general, in the money options have less liquidity versus at the money options. They have less trading volumes and a wider bid-ask spread, all other things being equal.

ADVANTAGES OF TRADING ITM OPTIONS

In the money options have a higher delta than ATM and OTM options, which means there’s a greater increase in value given the same move in the price of the underlying asset.
The already included intrinsic value of in the money options gives them a lower risk of losses versus other moneyness options. Even if there is no change in the price of the underlying asset by expiration, an in the money option would retain an intrinsic value, while an OTM or ATM option would expire worthless, and the trader would lose all the premium paid for the option.

DISADVANTAGES OF ITM OPTIONS

In the money options are more expensive in dollar terms than other moneyness options because of the intrinsic value held in ITM options.
ITM options have a smaller gain in percentage terms versus ATM and OTM options with the same price move in the underlying asset.

Real-world Scenarios: Using Deep ITM Calls to Replicate Stock Positions

One of the most common real-world uses of deep in-the-money (ITM) call options is to replicate stock ownership while committing far less capital.

Traders who believe strongly in the upside of a stock or commodity may purchase a deep ITM call instead of buying the underlying asset outright.

Because the option already has significant intrinsic value, its price closely tracks the asset’s movements.

For example, rather than purchasing $10,000 worth of a stock, a trader might acquire a deep ITM call with a similar delta (close to 1).

This position behaves much like the stock itself but requires a fraction of the upfront cost. The freed-up capital can then be allocated elsewhere, allowing the trader to diversify or manage risk more effectively.

This strategy is not limited to equities. In forex options and commodity options, traders often adopt deep ITM calls when they want exposure to an underlying asset but prefer to maintain liquidity and flexibility.

It is a capital-efficient way of gaining directional exposure without tying up all available funds.

Explore how AvaTrade’s forex and commodity options can help you trade with flexibility. Open a free demo account today to practise deep ITM strategies in real market conditions.

Risk Management Uses: Hedging vs Speculation

ITM options play a central role in both hedging and speculation, depending on the trader’s objectives.

Hedging: A trader holding a physical commodity, such as crude oil, may buy an ITM put option to protect against potential downside. Because the option has intrinsic value from the outset, it provides more immediate and reliable protection than an out-of-the-money alternative. This reduces portfolio volatility and secures a defined floor price for the asset.
Speculation: Conversely, speculative traders may use ITM calls to express a bullish outlook on a currency pair or commodity. The higher delta of an ITM call means the option’s value will move more closely in line with the underlying asset. This offers a higher probability of achieving profit, albeit with a larger upfront premium compared to out-of-the-money options.

In both cases, ITM options allow traders to fine-tune their exposure to market movements, balancing risk and reward with greater precision.

Examples Across Different Markets: Forex & Commodities

While ITM options are widely associated with equities, they are equally valuable in forex and commodity trading.

Forex options: Imagine a trader who expects the EUR/USD to rise. Instead of buying the pair directly, they purchase an ITM call option.

The higher delta ensures that the option moves almost one-to-one with the currency pair, capturing much of the upside while limiting risk to the option premium.

This provides directional exposure without the full capital outlay or margin requirements of a spot position.

Commodity options: In energy markets, traders often use ITM puts on crude oil to guard against falling prices, especially when holding physical barrels or futures contracts.

On the speculative side, a deep ITM gold call can be used to take a leveraged bullish stance while retaining the security of intrinsic value, making it a practical alternative to futures contracts.

These examples highlight how ITM options provide flexibility and control across asset classes, enabling both hedgers and speculators to achieve their objectives in capital-efficient ways.

Impact on Trading Strategies

ITM options are not only useful as standalone instruments — they also underpin many popular trading strategies:

Covered Calls: Holding a stock or commodity position while selling an ITM call generates immediate premium income. The ITM nature means a higher premium is collected, though it also increases the chance the position will be exercised. This suits traders comfortable with potentially selling their holdings at the strike price.
Protective Puts: Investors often buy ITM puts to safeguard long positions. Because they already contain intrinsic value, ITM puts provide stronger downside protection than out-of-the-money alternatives, ensuring that losses are capped more reliably.
Spreads: In vertical spreads, combining an ITM option with an OTM one creates structured risk/reward profiles. For instance, a bull call spread using an ITM long call and an OTM short call reduces cost while still offering meaningful upside exposure.

These strategies illustrate how ITM options can be integrated into broader trading plans, offering income generation, protection, and capital efficiency.

When Traders Choose ITM over OTM Options

The decision between an in-the-money (ITM) and an out-of-the-money (OTM) option often comes down to a trader’s priorities.

Probability of profit: ITM options already hold intrinsic value and move more closely with the underlying asset. This gives them a higher chance of expiring profitably, which appeals to risk-averse traders seeking more consistent outcomes.
Capital efficiency vs leverage: While OTM options require less premium and can deliver outsized percentage returns, they also carry a higher risk of expiring worthless. ITM options strike a balance by offering meaningful leverage, but with reduced “all-or-nothing” risk.
Strategic fit: For long-term investors, ITM options are often chosen when the goal is to replicate or hedge a position with greater certainty. Speculators, on the other hand, may prefer OTM when targeting explosive but less probable gains.

In practice, ITM options are a tool for traders who want higher reliability and lower break-even points, making them an essential choice in many portfolios.

Trader Psychology: Confidence vs Risk Appetite

Trading decisions are not purely mathematical — psychology plays a significant role in why traders gravitate towards ITM or OTM options.

Confidence and reassurance: Many traders prefer ITM options because they offer a stronger sense of security. With intrinsic value already built in, there is less pressure to rely on a large market move. This often reduces stress and supports disciplined decision-making, particularly for cautious or newer traders.
Chasing big wins: Others are drawn to the “lottery ticket” appeal of OTM options, where a small premium can lead to significant gains if the market moves favourably. While this aligns with a high-risk appetite, it can also result in frustration when options expire worthless.

Understanding these psychological drivers is key. ITM options appeal to those who value higher certainty and stability, making them a foundation for long-term strategies, while OTM options suit those who thrive on higher risk-taking.

Quick Start: Applying ITM Knowledge with AvaTrade

Understanding ITM options is only the first step — the real value comes from putting this knowledge into practice.

At AvaTrade, traders can apply ITM strategies directly across forex and commodities options, using our advanced yet intuitive options trading platform – AvaOptions.

Here’s how to get started quickly:

Open a demo account: Practise ITM strategies risk-free and explore how they perform under real market conditions.
Explore trading tools: Use our built-in educational resources, option chains, and analytics to identify ITM opportunities.
Go live with confidence: Once comfortable, open a real account to apply ITM trading in forex and commodities markets with full market access.

By starting with a demo and gradually progressing to live trading, you can apply ITM options in a way that is both controlled and scalable, keeping risk manageable while developing skill.

Take the next step in your trading journey. Open a free demo account with AvaTrade and start testing ITM strategies today.

FAQs on ITM Options

What does “in-the-money” (ITM) mean in trading?

An ITM option already has intrinsic value, meaning the strike price is favourable compared to the current market price of the underlying asset.
Why do traders choose ITM options instead of OTM?

ITM options offer a higher probability of profit and move more closely with the underlying asset, though they require a larger upfront premium.
Can ITM options be used for hedging?

Yes. ITM puts are often used to protect long positions in forex or commodities, providing more immediate downside protection than OTM puts.
Are ITM options suitable for beginners?

They can be. ITM options reduce the risk of expiring worthless, which can make them more comfortable for newer traders learning to manage risk.
How can I practise trading ITM options with AvaTrade?

You can open a free demo account with AvaTrade to explore ITM strategies in forex and commodities before moving to a real trading account.