The term describes the position of the strike price relative to the price of the underlying asset, and is used together with at the money and out of the money. When the gap between the strike price and the price of the underlying asset is especially large, the option is called deep in the money1.

Consider a hypothetical example in which the price of the underlying asset is 110 yen. A call with a strike price of 100 yen is ITM. By exercising, the holder can buy at 100 yen something worth 110 yen. A call with a strike price of 120 yen is not ITM, because exercising would not pay. A put works in the opposite direction: when the price of the underlying asset is 90 yen, a put with a strike price of 100 yen is ITM.

This definition looks only at the difference from exercising and does not include the premium paid at the start. The profit or loss including the premium is a separate matter: even for an ITM option, if the gain from exercising is smaller than the premium, the overall result is a loss2.

Notes

  1. Japan Exchange Group, "イン・ザ・マネー（ITM）（用語集）" (In the money (ITM), glossary) (in Japanese): the definition, the conditions for calls and puts, and the explanation of deep in the money. ↩

  2. Japan Exchange Group, "コール・オプション（用語集）" (Call option, glossary) (in Japanese), which states that the buyer of a call profits when the price of the underlying asset at expiry is higher than the sum of the strike price and the premium. ↩