In the money, at the money, and out of the money are terms describing the relationship between market and an option or binary option based on that market.
For the buyer of a binary option, if the price of the underlying market is above the strike price of the binary option, the binary is said to be “in the money.” If the market stays above the strike price, the binary will have full value of $100 at expiration.
Thus, the buyer wants the market to be in the money.
In, at, and out of the money
The buyer of a binary option that expires in the money will receive a $100 payout and the seller will receive zero. Every binary option is based on the question:
Will this market be above this strike price at expiration?
Buyers expect the answer to be yes and sellers expect the answer to be no. In other words:
- If you buy a binary (or any) option, you want the underlying market price to be above the strike price at expiration. In other words, you want it to be in the money.
- If you sell a binary (or any) option, you want the underlying market price to be at or below the strike price at expiration. In other words, you want it to be at the money or out of the money.
Extrinsic and intrinsic value
During the life of the contract, prior to expiration, a binary option will usually be cheaper to buy when it is further out of the money.
Before expiration, an option has extrinsic value, which reflects how likely it is to expire in the money. In-the-money options also have intrinsic value, because the market is already above the strike price.
An in-the-money option will typically have a higher purchase price than at- or out-of-the-money options, because it has intrinsic value. The market is already above its strike price. If it remains in the money at expiration, the option will get the full $100 payout.
Possible advantages to buyers and sellers
A trader may choose to sell an in-the-money binary option if they believe the market will go down and the binary will end up out of the money and expire at zero. That outcome would let the seller receive the full $100 value as profit.
For buyers, in the money binary options may offer higher probability (at the time of purchase) of expiring in the money, since the market is already above the strike price. In exchange for that edge, the buyer will typically have to pay more to buy the binary, since the price reflects that edge. That means a higher initial risk in exchange for that probability advantage.
In either case, traders don’t need to wait for expiration. If you buy or sell at one price and the option’s value moves in your favor, you can exit before expiration to take profit.
Exiting trades before expiration
If you exit a trade prior to expiration, you will receive the current bid or offer value of the contract.
- If you bought the binary, you will sell at the bid to exit.
- If you sold to enter the trade, your exit order will be a buy at the current offer.
This is true whether an option is at, in, or out of the money. For example, you could buy an out-of-the money binary and sell it for a higher price while it is still out of the money. Or you could sell an in-the-money option and exit as the market drops to just around the strike price. Your profit or loss is always the difference between the amount you paid to enter and the amount you receive upon exit.