Definition
The term in-the-money refers to an option that has positive intrinsic value. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.
Explanation
When an investor holds an option they are provided with the right, but not an obligation, to buy or sell the underlying asset at the strike price on or before the contract's expiration date. In the case of a call option, the holder has the right to buy the underlying asset, while a put option confers the right to sell the underlying.
An option that is in-the-money (ITM) will usually trade at a premium that accounts not only for the time value of the option itself, since it can it increase in value over time, but also the fact that if the option were exercised, the holder would make a profit on the transaction. When discussing standard options, there are two scenarios in which the contract would be in-the-money:
Put Options: If the strike price of the put option is greater than the current market price of the underlying security or asset, then that option is said to be in-the-money. The holder of the put can purchase the asset at market and exercise their right to sell it at the contract's strike price, which is greater than market.
Call Options: If the strike price of a call option is less than the current market price of the underlying security or asset, then that option is said to be in-the-money. The holder of the call could exercise their right to buy the asset at the contract's strike price, and then sell the asset at market, which is greater than the contract's strike price.