An option is called “in the money” when it has intrinsic value. The term is used for options on stocks or futures contracts when the price of the underlying market is at or beyond a certain level, making it possible for the option to be exercised, or converted into that underlying contract. The option’s value is called intrinsic because it can actually be turned into something else of value.
In contrast, an option’s extrinsic value reflects only the possibility of turning it into something of value at a future time. Extrinsic value is considered speculative, since it’s a probability of a future outcome.
Binary options have strike prices. If you buy a binary option, then any time the underlying indicative market price is above that price, the option is in the money.
If the underlying price is equal to the strike price, the option is considered at the money. And if the underlying price is below the strike price, the option is called out of the money.
All of the above apply when you buy a binary option (or any option). If you sell the option, it reverses. The option is considered in the money when the underlying price goes below the strike price, since a seller profits when the price goes down.
With Nadex binary options, if the option finishes in the money at expiration, the settlement payout is a fixed $100 per contract and always cash settled. You can’t exercise it or exchange it for the underlying futures contract. It is a straightforward outcome: if the binary option expires in the money, it pays $100.
Prior to expiration, the binary’s value will rise and fall based on buying and selling. Generally, options that are in the money prior to expiration have higher values, but will only go to the full $100 at expiration.
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