What does "in the money" mean regarding options?

The term "in the money" refers to an option that has intrinsic value, meaning that if the option were to be exercised immediately, it would yield a positive payoff. For a call option, this occurs when the current price of the underlying asset exceeds the option's strike price. For a put option, it occurs when the strike price is greater than the current market price of the underlying asset.

This concept is crucial in understanding options trading because it indicates a favorable situation for the option holder. The positive payoff reflects the opportunity to buy an asset at a lower price or sell it at a higher price than what is currently available in the market. Recognizing whether an option is "in the money" helps traders make informed decisions about exercising options, selling them, or holding onto them for potential further gains.