Why Traders Use In the Money Options for Lower Risk Strategies

Options trading offers many pathways to expressing market views, hedging positions, or generating income. Among these pathways, in the money (ITM) options occupy a unique niche: they carry a higher premium but often provide more predictable payoffs and lower relative risk than their out-of-the-money counterparts. 

In this article, we explore why traders use in-the-money options for lower risk strategies, delving into the mechanics, the advantages, and the considerations. Along the way, we’ll naturally incorporate the in the money definition (linked below) for clarity and reference.

Understanding What “In the Money” Means

Before we dive into strategies, it helps to ensure everyone is on the same page regarding terminology. The in the money definition describes an option whose strike price is favorably placed relative to the current price of the underlying asset.

In simple terms, for a call option to be “in the money,” the strike price must be below the current market price; for a put option, the strike must be above the market price. Because of this favourable position, an ITM option already has intrinsic value, not just time value. You can read more about the precise mechanics via this helpful information on the in the money definition.

That intrinsic value gives ITM options a “buffer,” making them less susceptible to small adverse movements in the underlying, which is why serious traders often prefer them when managing downside exposure.

Why Traders Lean Toward ITM Options for Risk Mitigation

One of the primary reasons traders gravitate toward ITM options is that they tend to have higher delta than out-of-the-money options. Delta measures how much the option’s price changes relative to a one-point move in the underlying. Because ITM options move more in tandem with the underlying asset, they’re less sensitive to volatility and time decay—offering a more reliable “tracking” behaviour. That reliability often translates into a higher probability of finishing profitably.

Another advantage is the intrinsic value cushion against time decay. Time decay (theta) works against an option, eroding its extrinsic (time) value as the expiration date approaches. Because ITM options have significant intrinsic value, they are less punished by theta in relative terms than OTM options, which rely almost entirely on extrinsic value. In effect, the intrinsic portion protects part of the premium from decaying completely—offering traders better resiliency as expiration nears.

Common Strategies That Use ITM Options

Protective puts are one example. Imagine you hold a long position in a stock that you expect to rise over the next few weeks but fear a sharp pullback. Instead of buying a far-OTM put, you choose a slightly ITM put. That gives you immediate downside protection because the option already has intrinsic value and will respond more proportionally to downward moves. The cost is higher, but the emotional comfort and reduced slippage risk can make it worthwhile.

Another strategy is bull call spreads with ITM entries. In a bullish market view, instead of buying a single ITM call and risking its higher upfront cost, a trader might buy an ITM call and simultaneously sell an even higher strike (perhaps ATM or OTM). This forms a call spread. The net premium is lower than owning the call outright, but the upside is limited. The advantage is that the lower leg’s intrinsic value cushions some downside, and the strategy still benefits from favourable upward moves.

More advanced traders sometimes use diagonal spreads, where one enters an ITM option with a longer expiration and sells a shorter-term option at a farther strike. As time passes, the shorter expires or is rolled. This gives the trader leverage to maintain protection while managing capital exposure. By staying more firmly “in the money” on the long leg, they preserve intrinsic value and momentum advantage.

Risks and Trade-Offs You Should Know

No strategy is without trade-offs. Identifying when ITM options make sense—and when they don’t—is part of a disciplined trader’s playbook. The most obvious downside is the higher upfront cost. Because ITM options carry more intrinsic value, you pay more premium than for an ATM or OTM option. That means you must be more certain (or structured smartly) to make that premium back.

Another consideration is the potential for limited returns. When using spreads or covered calls with ITM strikes, you often cap your upside more aggressively. If the underlying rallies strongly, the benefit beyond the strike may be less than what a straight long ITM or ATM position could have captured.

Finally, American-style ITM options bring the risk of early exercise, particularly around dividend dates. A short ITM position, such as writing a covered call, may be assigned early, so risk management and planning are essential.

Conclusion: Embrace Discipline Over Hype

The beauty of options is the flexibility they bring, but flexibility can’t replace discipline—and clarity about one’s goals, risk appetite, and market assumptions. Traders who use in-the-money options for lower risk strategies are not playing it safe out of fear; they’re intelligently choosing how to balance protection, probability, and cost.

By combining intrinsic value, delta responsiveness, and reduced sensitivity to time decay or volatility, properly selected ITM options become powerful tools—not guaranteed wins, but thoughtful levers. Whether you’re hedging, generating income, or structuring directional plays, ITM positions can serve as anchors in periods of volatility or uncertainty.