A call option is said to be in the money when the market price of the security with which it is linked is higher than the exercise price of the option. Conversely, a put option is considered to be in the money when the market price of the security with which it is linked is lower than the exercise price of the option. In both situations, the holder of the option can earn a profit by exercising the option. When the reverse relationships are present, an option is instead considered to be out of the money.
For example, Mr. Smith has a call option to buy shares in ABC Company, where he has the right to buy the shares for $10 each. The current market price of the shares is $12, which means that he can earn a profit of $2 per share by exercising the option and then selling the shares that he has acquired. In this case, the option is in the money.