What does "in the money" mean?
An option is "in the money" (ITM) when it has intrinsic value. That means exercising the option right now would produce cash (ignoring the premium you paid).
- A call is ITM when the stock price is above the strike price. You could buy shares at the strike and immediately sell them at market for a profit.
- A put is ITM when the stock price is below the strike. You could sell shares at the strike that are worth less on the open market.
Why ITM options cost more
ITM options are more expensive because part of what you are paying for already has real value. A call on a $100 stock with a $90 strike is at least $10 in the money, so its premium has to be at least $10 per share. Anything on top is extrinsic value.
How ITM options behave
Deep-ITM options move nearly dollar-for-dollar with the stock (high delta). They have less leverage than OTM options but a much higher chance of paying off. Traders who want exposure that mimics owning the stock, with less capital outlay, often buy deep-ITM calls.