ITM Options: A Strategic Investment Tool
An in-the-money (ITM) option is one that has intrinsic value: a call whose strike price is below the current stock price, or a put whose strike price is above it. Because they already have intrinsic value, ITM options cost more than out-of-the-money options, have higher deltas (they move more closely with the stock), and are more likely to finish in the money at expiration. Traders use them as a lower-cost substitute for owning or shorting the stock, and in strategies such as covered calls and guts spreads. This article explains how ITM options work, their benefits and trade-offs, and how to manage risk.
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What are ITM Options?
An ITM call has a strike price below the underlying security's market price; an ITM put has a strike price above it. Buying an ITM call gives the right to buy the security below its market price, and buying an ITM put gives the right to sell it above its market price. The difference between the strike and the market price is the option's intrinsic value; anything paid above that is time value. ITM options can be used for speculation, hedging and income strategies.
Benefits of Investing in ITM Options
ITM options have a higher probability of finishing in the money than at-the-money or out-of-the-money options, and less of their price is time value that decays. Compared with buying the stock, a long ITM call gives similar upside for less capital, and the most you can lose is the premium paid, though that premium can be lost entirely if the stock falls below the strike.
ITM Options Strategies
Common strategies that use ITM options include stock replacement (buying a deep ITM call instead of shares), buy-writes and covered calls with ITM strikes for more downside cushion, and guts spreads. A long guts buys an ITM call and an ITM put on the same underlying and expiration and profits from a large move in either direction; a short guts sells both and profits if the stock stays between the strikes, as explained in the MarketXLS short-guts and long-guts guide.
Risk Management
Options traders should always bear in mind that investing in options carries more risk than investing in stocks, regardless if they’re ITM options or any other type of options. Investors should ensure they understand how options work and how they should be priced before investing. Risk management is also critical, especially in volatile markets or when trading with high leverage. Investors need to consider the cost of the investment, the amount of time the option will be active and the level of liquidity available to help reduce risk and maximize returns.
MarketXLS and How it Can Help
MarketXLS is an Excel add-in that returns option chains, quotes and Greeks through formulas such as =QM_GetOptionChain("SPY"), so you can compare ITM, at-the-money and out-of-the-money strikes in a spreadsheet. Options data is end-of-day on the Standard plan and real-time on the Advanced and Business plans.
ITM options cost more but behave more like the stock and are more likely to expire with value. They suit investors who understand options risk and size positions accordingly. This article is educational and not investment advice.
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