ITM options are in the money at the time of expiry, meaning the option’s strike price is lower than the current market price of the underlying asset. For example, if you have a call option with a strike price of 50 Yen and the underlying stock is trading at 60 Yen, your option is in the money by 10 Yen.
The two options to choose from are call options and put options. Call options give you the right to buy an asset at a specific price, while put options give you the right to sell an asset at a specific price. So, in our example above, you have the right to buy the stock at 50 Yen if you have a call option. If you have a put option, you have the right to sell the stock at 50 Yen.
An ITM option is usually exercised on expiry in Hong Kong, and the options holder stands to make a profit if they exercise their option. For example, in our example above, the call option holder would profit 10 Yen per share if they exercised their option and bought the stock at 50 Yen.
However, the option holder is not obliged to exercise the option and may choose to keep it. For a profitable (in-the-money) option, this would be a highly irregular decision. After the expiry date the option can no longer be bought or sold.
How to trade ITM options
Choose the correct option
When you are choosing an ITM option to trade, it is crucial to consider the following factors:
The underlying asset
Make sure you choose an underlying asset you are familiar with to help you make better predictions about its future price movements.
The expiry date
Make sure you choose an expiry date suitable for your trading strategy. If you are a long-term trader, you may want to choose a more extended expiry date so that you have more time to wait for the price of the underlying asset to move in your favour.
The strike price
Please make sure the strike price is within the expected range of the asset and consider whether it is likely to be reached on expiry.
Decide whether to buy or sell
Once you have chosen the correct option, you must decide whether to buy or sell it. If you think the underlying asset price will rise, you should buy a call option. If you think the underlying asset price will fall, you should buy a put option.
Place your order
Once deciding whether to buy or sell, you need to place your order with your broker. Make sure you specify the following details:
- The type of option (call or put)
- Whether you are buying or selling (writing) the option
- The underlying asset
- The expiry date
- The strike price
- The amount of money you are willing to invest
- Any margin you intend to use
Monitor your position
After placing your order, you need to monitor your position and adjust it as necessary. For example, if the underlying asset’s price moves against you, you may want to close your position to limit your losses. Alternatively, if the underlying asset’s price moves in your favour, you may want to hold your position and wait for it to reach its full potential.
Close your position
You can sell your option back to your broker when you are ready, known as “closing out” your position. Your profit or loss will depend on the balance between what you paid for the option and the price you sell for.
Why trade ITM options?
Potentially higher profits
ITM options offer the potential for higher profits than OTM or ATM options because they have a lower premium and thus require a minor price movement for you to make a profit.
Less risk
ITM options also offer less risk than OTM or ATM options. The underlying asset’s price is less likely to move sharply against you and cause you to incur heavy losses.
Click here to learn more about ITM stocks.
