A:

A call option gives the buyer or holder the right, but not the obligation, to buy the underlying security at a predetermined strike price on or before the expiration date. "In the money" describes the moneyness of an option. Moneyness describes the relationship of a financial derivative's strike price to the underlying security's price. For option contracts, the moneyness describes its intrinsic value given the current inputs.

A call option is in the money when the underlying security's current market price is greater than the call option's strike price. The call option is in the money because the call option buyer has the right to buy the stock below its current trading price. When an option gives the buyer the right to buy the underlying security below the current market price, then that right has intrinsic value. The intrinsic value of a call option equals the difference between the underlying security's current market price and the strike price.

For example, suppose a trader buys one call option on ABC with a strike price of $35 with an expiration date one month from today. If ABC's stock price trades above $35, the call option is in the money. Suppose ABC's stock price is trading at $38 the day before the call option expires. Then the call option is in the money by $3 ($38 - $35). The trader can exercise the call option and buy 100 shares of ABC for $35 and sell the shares for $38 in the open market. The trader will have a profit of $300 (100* ($38-$35)).

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RELATED TERMS
  1. Strike Price

    Strike price is the price at which the underlying asset of a ...
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  3. Put Option

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