In the money options (ITM) are a good way to participate in a stock's price movement without actually owning the stock.
Traders will often target the ITM option as its price moves very close to the stocks actual price movement.
For example: You buy an option for $1 on a $30 stock. The stock moves up in price to $31. A 3% gain, very realistic.
The $1 "ITM option" will also move up a dollar in price to $2. A 50% gain, also very realistic.
Now let me give you a minute to wipe the drool from your mouth and tell you that these are just examples. Yes it plays out "somewhat" like that, but don't count on it.
I'm getting ahead of myself. Let me define what In the money options (ITM) are.
A "Call option" would be ITM if the stock price were trading "above" the strike price.
For example, suppose the stock price is $40 and the strike price is $20. You would have the right to "buy" the stock for $20.
If you exercised your right and bought the stock for $20, you could immediately sell it for $40 on the open market and earn a $20 profit.
Another way to explain it is that you could say your option has $20 of real value because you can exercise your option and buy the stock for $20 less than the current market price.
A "Put option" is ITM if the strike price is "higher" than the market price of the underlying stock.
Here's a picture for you visual learners:
ITM options cost more, but people like them because they generally move dollar for dollar with the stock price.
It's not a strategy I trade so I don't have much else to say on the matter (smile).
Here is a quick video overview:
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