When is a call option in the money?
A call option is in the money (ITM) when the underlying security's current market price is higher than the strike price of the call option. The call option is in the money because, if it expires in the money, the buyer will have a right to buy the stock at that level. When a contract gives the buyer the right to buy the underlying security below current market price, that right has intrinsic value. The intrinsic value of a call option equals the difference between the current market price and the strike price.
A call option (or alternatively a put option) gives the buyer or holder the right, but not the obligation, to purchase securities of a certain type at a predetermined price on or before an agreed-upon time frame. "In the money" describes the moneyness of an option. All derivatives have a moneyness, which is the relationship between the derivative's strike price and the spot price of the underlying security. A call option is "out of the money" if the strike price is higher than the price of the underlying security.
One major factor that determines the price of an option is its ITM status. The more ITM an option is, the more expensive it will be to purchase. On the other hand, out-of-the-money options are cheaper and less expensive the more time passes. One factor that can affect the price of an option is volatility. When you buy an option, it’s possible for the price to go up or down by a lot, which also changes its value. Therefore, if you're considering buying an option, then it may be worth looking at how volatile that particular product is and how long until the expiration date.
A Simple Example (from Investopedia.com)
For instance, 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 trades above $35, the call option is in the money. Suppose ABC's stock 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 x ($38-$35)).
