ITM Call Options Demystified: Unlocking Strategic Advantage in Options Trading

What is an In The Money (ITM) Call Option?

An In-the-Money (ITM) call option refers to an options contract in which the strike price is set below the prevailing market price of the underlying security. Because it already holds intrinsic value, this type of option tends to appeal to investors who prioritise a greater likelihood of profitability, even though it requires a higher initial premium compared to other options.
For example, if a stock is trading at ₹1,200 and the call option has a strike price of ₹1,000, the call option is considered ITM.

ITM Meaning in Trading: Key Features

• Intrinsic Value: ITM options have built-in value at purchase.
• Higher Premiums: Reflecting the higher probability of profitability.
• Lower Risk: Compared to Out-of-the-Money (OTM) options, due to higher chances of expiring with value.

Therefore, ITM call options are often selected by traders who prioritise consistent outcomes over higher but less certain profits.

Advantages of In-the-Money Call Option

Understanding the strategic upside of ITM call options helps both retail investors and institutional traders make informed decisions. 
Here are the primary advantages:

Higher Probability of Profit

The intrinsic value within ITM options offers traders a greater likelihood of achieving profitable results, particularly in stable or slightly upward-trending markets.

Less Impact from Time Decay (Theta)

Since ITM options already possess intrinsic value, they are less susceptible to time decay than OTM options.

Leverage with Reduced Volatility Risk

Compared to buying the underlying asset outright, ITM call options offer similar exposure with less capital and reduced volatility sensitivity.

Better Hedge for Portfolio Managers

Institutional investors utilise ITM options as strategic hedging tools, such as locking in buying prices ahead of expected stock price increases.
 

Disadvantages of In-the-Money Call Option

While ITM options offer many benefits, they also come with drawbacks that can affect profitability and flexibility:

Higher Premiums

ITM options require a significant premium upfront, which increases the break-even point for the trade.

Lower ROI Compared to OTM Calls

While ITM options offer greater safety, their risk-adjusted returns might lag in highly bullish markets where OTM calls have the potential to deliver significantly higher profits.

Reduced Leverage

Since ITM options are more costly, traders may only afford a small number, which can limit how much they earn if the trade is successful.

Capital Commitment

Paying the premium for an ITM call can be expensive, particularly with high-priced stocks, which might lock in funds that could otherwise be used for other investment opportunities.
 

An Example of an In-the-Money Option

Here’s a clear example to demonstrate how an ITM call option is applied in a real-world scenario:

Stock XYZ is trading at ₹1,500
 
You purchase a call option with a strike price of ₹1,400 for a premium of ₹120

• Intrinsic Value = ₹1,500 – ₹1,400 = ₹100
• Total Premium Paid = ₹120
• Break-Even Price = ₹1,400 + ₹120 = ₹1,520

If the stock price rises to ₹1,600 by expiry:

• Profit = ₹1,600 – ₹1,520 = ₹80 per share
• Total Return = ₹80 × lot size – premium paid

This example shows that ITM options provide instant intrinsic value and more straightforward opportunities for profit compared to OTM options.
 

How Being In-the-Money Affects an Option’s Premium?

Options premiums are made up of two parts: intrinsic value and time value.

Intrinsic Value

As seen in our earlier example, the intrinsic value of the option is the immediate value of the option if exercised. Although, it cannot be exercised before the expiry date of the option. For ITM calls, this component is always positive for an in-the-money option..

Time Value

This is the portion of the premium that reflects the probability of further favourable movement before expiration. It decreases as expiry nears, a phenomenon known as time decay or theta.
In short:

• ITM options = High intrinsic + Lower time value
• OTM options = Zero intrinsic + Entirely time value

The higher premium for ITM call options is justified because they are already profitable and less speculative.
 

What Happens When Options Expire In-the-Money?

When a call option expires ITM, the holder can exercise the right to buy the underlying asset at the strike price to realise profits.

Exercising the Option

As per SEBI rules, stock options on Indian exchanges are physically settled upon expiry. Traders should ensure sufficient funds or shares to honour obligations.

Automatic Settlement

In many exchanges (including NSE/BSE), ITM options are automatically exercised unless the holder takes action to the contrary, ensuring the value isn’t lost.

Tax & Regulatory Implications

For institutional or B2B investors, it’s essential to consider,

• Taxable gains realised from exercised options.
• Margin requirements in the case of physical delivery or assignment.
• Accounting treatment of derivatives under relevant standards like IFRS or GAAP.

Understanding the outcomes at the time of expiry date for ITM options is key to managing positions strategically and ensuring regulatory compliance.
 

Final Thoughts

Grasping the concept of ITM options goes beyond simple definitions, it's about applying that understanding to make smarter, more strategic investment decisions. ITM call options offer a unique combination of built-in value and leveraged opportunity, positioning them as a valuable asset for both individual traders and institutional investors.

Whether you're safeguarding a sizable equity portfolio or entering a bullish trade with controlled exposure, ITM strategies in the stock market can deliver reliable performance when executed rightly.