In The Money

In-the-money (ITM) options have intrinsic value, meaning they would be profitable if exercised immediately. For calls, ITM means the strike price is below the current stock price. For puts, ITM means the strike price is above the current stock price. These options move almost dollar-for-dollar with the stock, making them behave like stock ownership with leverage. While ITM options are more expensive due to their intrinsic value, they offer higher probability of profit and lower time decay risk. Understanding ITM dynamics is crucial for stock replacement strategies, assignment management, and knowing when your positions need immediate attention.

What Makes an Option ITM

The ITM relationship is opposite for calls and puts:

ITM Calls: Strike < Stock Price

  • $45 call with stock at $50 = $5 ITM
  • Right to buy at $45 when worth $50
  • Immediate $5 profit if exercised

ITM Puts: Strike > Stock Price

  • $55 put with stock at $50 = $5 ITM
  • Right to sell at $55 when worth $50
  • Immediate $5 profit if exercised

The amount ITM equals the intrinsic value.

ITM Premium Breakdown

ITM options have two value components:

Example: $5 ITM Call

Stock at $50, $45 call trading at $5.75:

  • Intrinsic Value: $5.00 (guaranteed value)
  • Extrinsic Value: $0.75 (time + volatility)
  • Total Premium: $5.75

As expiration approaches, extrinsic shrinks to zero, leaving only intrinsic.

Deep ITM vs Slightly ITM

$10 ITM ($40 call, stock $50):

  • Mostly intrinsic value
  • Minimal extrinsic value
  • Delta near 1.00
  • Moves like stock

$1 ITM ($49 call, stock $50):

  • Small intrinsic value
  • Significant extrinsic value
  • Delta around 0.60
  • Still responsive to Greeks

ITM Greeks Behavior

ITM options have distinct Greek characteristics:

Delta: High and stable

  • Deep ITM calls: 0.80-1.00
  • Deep ITM puts: -0.80 to -1.00
  • Move nearly 1:1 with stock

Gamma: Low

  • Less acceleration
  • More predictable
  • Lower explosion risk

Theta: Moderate

  • Less time value to decay
  • Dollar decay lower than ATM
  • Percentage decay still matters

Vega: Reduced

  • Less volatility sensitivity
  • Intrinsic value doesn’t change with IV
  • Only extrinsic portion affected

ITM for Option Sellers

Selling ITM options requires careful consideration:

ITM Put Selling (Rare)

Sell $52 put with stock at $50:

  • Immediately $2 ITM
  • Very high assignment probability
  • Must collect >$2 premium to profit
  • Usually poor risk/reward

When Used:

  • Expecting strong bounce
  • Very high IV environment
  • Part of spread strategy

ITM Call Selling (Covered)

Sell $48 call on stock owned at $45, current $50:

  • Immediately $2 ITM
  • High assignment probability
  • Locks in $3 profit plus premium
  • Common for exiting positions

Strategic Use:

  • Ready to sell shares
  • Capturing elevated IV
  • Tax loss harvesting

ITM for Option Buyers

ITM options offer stock-like exposure:

Stock Replacement Strategy

Instead of buying 100 shares at $50 ($5,000):

  • Buy $40 call for $10.50 ($1,050)
  • $10 intrinsic + $0.50 extrinsic
  • Controls same 100 shares
  • 79% less capital required

Benefits:

  • Limited downside ($1,050 max loss)
  • Similar upside participation
  • Leverage remaining capital
  • Defined risk

Risks:

  • Time decay on extrinsic value
  • No dividends
  • Expiration deadline

ITM Assignment Dynamics

ITM options at expiration almost always assign:

ITM Assignment Probability

Friday 3 PM Rule: If your short option is ITM with 1 hour left, assignment is virtually certain. Take action or accept assignment.

Early Assignment Risk

ITM options can assign early when:

  • No extrinsic value remains
  • Dividend exceeds extrinsic value
  • Hard-to-borrow stocks
  • Deep ITM with weeks remaining

Monitor deep ITM positions for early assignment risk.

Managing ITM Positions

Different strategies for different situations:

Short ITM Options

Roll Before Expiration:

  • Buy back ITM option
  • Sell new OTM option
  • Collect net credit if possible
  • Buy time for recovery

Accept Assignment:

  • ITM puts: Buy shares as planned
  • ITM calls: Sell shares as planned
  • Part of wheel strategy
  • Continue income generation

Long ITM Options

Exercise vs Sell:

  • Usually better to sell (capture extrinsic)
  • Exercise only if:
    • Want shares
    • Dividend capture
    • No bid/ask spread

Roll to Maintain:

  • Sell current ITM
  • Buy new ITM further out
  • Maintain stock exposure
  • Reset time decay

ITM Spread Strategies

ITM options anchor spread strategies:

Bull Call Spread

  • Buy ITM call (high cost, high delta)
  • Sell OTM call (reduce cost)
  • Limited risk and reward
  • Profit from moderate moves

Bear Put Spread

  • Buy ITM put (high cost, high delta)
  • Sell OTM put (reduce cost)
  • Bearish with defined risk
  • Lower capital requirement

Common ITM Mistakes

Selling Naked ITM: Extremely high assignment risk Ignoring Extrinsic: Exercising when selling better Holding Through Expiration: Missing extrinsic value Poor Position Sizing: ITM requires more capital

ITM Scanning and Selection

Finding ITM opportunities:

For Sellers (Covered Calls)

Look for:

  • Stocks you’re ready to sell
  • Elevated IV on ITM strikes
  • Sufficient premium above intrinsic
  • Acceptable exit price

For Buyers (Stock Replacement)

Calculate:

  • Break-even vs stock purchase
  • Leverage achieved
  • Time needed for thesis
  • Total capital efficiency

Key Takeaways

In-The-Money (ITM):

  • Has intrinsic value
  • Calls: strike below stock
  • Puts: strike above stock
  • High delta (stock-like movement)
  • High assignment probability
  • More expensive but higher win rate
  • Used for stock replacement or exits

ITM options bridge the gap between options and stock ownership. While most income strategies focus on OTM options, understanding ITM dynamics helps manage challenged positions, implement stock replacement strategies, and recognize when assignment is imminent. Whether rolling away from ITM or deliberately trading ITM options, master these concepts to handle all market situations.