In the context of options, in the money refers to the state where the current market price of a given asset (stock, commodity, bond, rate, etc) underlying an option contract is above its strike price (striking price or exercise price), if the option is a call, or below its strike price if the option is a put. For example, a call option on XYZ at a strike price of $50 would be in the money if XYZ were trading at $55. Likewise, a put option with the same strike price would be in the money if XYZ were trading at $45.

An enough in-the-money option allows its holder a profitable exercise on the underlying. That means the premium of an option should be taken into account in order to determine whether exercise is worthwhile or not. For example, if the call option mentioned above was originally bought for $3, then it would be in the money by:

Amount by which a call option is in the money= underlying price – (strike price + premium)

Amount by which the call option is in the money= 55- (50 + 3) = $2

In the same token, if the put option in the above example was initially purchased for $2 then it would be in the money by:

Amount by which a put option is in the money= strike price – (underlying price + premium)

Amount by which the put option is in the money= 50 – (45 + 2) = $3

As far as swaps are concerned, in the money refers to a situation where the present value of the net fixed-rate payments are less than the net present value of the net floating-rate receipts from the perspective of a fixed-rate payer. Similarly, from the view point of a floating rate payer, the swap would be in the money when the present value of the net floating-rate payments are less than the present value of the net fixed-rate receipts.

With respect to futures (forward) contracts, a contract in which the prevailing market price at the delivery date is above the futures (forward) price (from a holder’s perspective) would be in the money. For example, a futures contract whose futures price is $30 and is trading at delivery date for $35. The futures holder will receive a gain of $5 for every unit of the contract. This is the amount by which the contract is in the money.