An in-the-money (ITM) option possesses intrinsic value because its strike price is favorable relative to the current market price of the underlying asset. For a call option, this occurs when the underlying asset’s price exceeds the strike price; for a put option, the underlying price must be below the strike price. The intrinsic value represents the profit realized if the option were exercised immediately.
Exercise
The exercise of an ITM option allows the holder to buy or sell the underlying asset at the predetermined strike price, locking in a profit. As an option approaches expiration, its time value diminishes, leaving the intrinsic value as the primary component of its price. Traders must decide whether to exercise the option, sell it in the market, or allow it to expire, considering factors like transaction costs and market liquidity.
Position
Holding an in-the-money option creates a specific risk profile for a trader, as the position is already profitable. The value of an ITM option moves closely with the underlying asset’s price, exhibiting a delta approaching one for calls and negative one for puts. This high delta means the option behaves similarly to holding the underlying asset itself, but with the added benefit of leverage.
