We have seen what option contracts are and how they work in our previous articles; here we are going to see what the option - in the money is all about.
Options contracts are mutually agreed-on contracts between the buyer and seller to either buy or sell the underlying asset. (They usually are dealt with in the group of 100 shares) at a specific price until or on the day of the contract expiration. In the call option, you have the right to buy an underlying asset but are not obliged to buy in the same way the put option gives you the authority to sell but again are not obliged to sell.
Now, An option contract is being considered - in the money if the buyer pays less than the current market value of the stock,(in a call option) or the seller sells at a higher price than the current market price (in a put option).
When the Strike price surpasses the current market price, then we can say the option is In The Money (ITM)
It concludes that the owner of the options contract can trade or sell the group of 100 shares of the underlying asset mentioned in the contract at a higher price than its market price.
When the underlying asset’s market price becomes lower than the Put Option’s strike price, then it is In-The-Money. The contract holder has the authority to sell the shares at a higher market price.
The ITM Put option’s strike/spot price is more in comparison to its current market value.
If an investor owns an ITM put option contract till expiry, it indicates that the stock price is lower than the strike price. This suggests that there is still the likelihood that the decision is worthwhile. A buyer of a put option predicts that the stock price will decline significantly below the option's strike price to at least recover the cost of the premium paid.
Intrinsic value refers to the difference between a put option's strike price and the price of the underlying asset at the time it was purchased since the put option is worth at least that much.
Things you must know:
In the put option contracts. The contract holder fixes the price at which he would sell the underlying asset at a particular time.
Though the seller here has the right to sell the underlying asset, he is not obliged to sell the assets at the time of expiration.
The option is exercised on its expiration date only.
If the seller does not get any profit out of it, then option500 can be called worthless.
There is a factor called time value, that can fluctuate the price of an underlying asset.
The time value can be said as the extra premium above the intrinsic value of the options that investors are ready to pay.
Let us understand the concept with the help of a Put Option in the money example, to get complete insights. Put Option in the money example will help you in deciding to enter the contract and to make a better decision.
Example of put option in the money:
We are going to assume the example below for understanding the concept of the Put option in the money.
Let us assume you are having the shares with the put option of ABC limited. The put option contract that you have allows you the authority to sell the 100 shares of ABC limited at a strike price of Rs. 100. Now you entered into the contract by paying Rs. 10 as a premium, assuming that the price will fall by the time of contract expiry.
Now, your assumptions came to be true, the price of a share dropped to rs. 75. So, here by applying the in-the-money put option you can get a profit of Rs. 15 (25-10). You get this net profit by deducting the premium paid from the difference. (100 actual rice -75 strike price =25 difference price - 10 premium paid =15 Net profit)
Now, the number of the shares you have is 100, multiply 15 by 100 (15*100) = 1500.
So, you get a net profit of Rs. 1500.
So, with the above example, you will be cleared with how Does Put Option Make Money.
Let us now see some situations of the option in the money.
Let us say my put option expires in the money, what happens then?
There are 3 different positions for options: At The Money (ATM), Out Of Money (OTM), and In The Money (ITM).
Once the put option expires assuming that the investor holds the shares In The Money, they have ownership in the underlying asset which is sold at the strike price.
Now, what can happen if an investor sells put options in the money?
You can exercise a put option when it is in the money. You get an opportunity to exercise the put option In The Money.
This indicates that you can sell the underlying asset's shares in compliance with the terms of the contract at the strike price and gain. Profit from it.
This is calculated by deducting the asset's current price from the strike price and then deducting the premium paid.
You have the option to sell the contract to a different buyer if you decide not to execute it.
We would like to conclude this topic here, as we have discussed almost everything related to Put Option In The Money, we have seen the example and as an investor how Does Put Option Make Money. We have also seen that if the seller is not interested in executing the trade, he can always choose any other buyer for that contract.
If you have any concerns related to this topic, you may surely reach us via the comment section. Hope you like the details. Thank you.