Deep in The Money

Explaining Deep in The Money

Basically, deep in the money options is defined as any other option along with a term of lesser than 90 days and a strike price that is one strike lesser than the highest stock price. Or, this could also be an option with a term of more than 90 days and the strike price less than two strikes than the highest stock price.

Therefore, an option will be deep in the money if it’s in the money by Rs. 750 and more. For options, both put and Call can be in the money. Thus, if a Call Option is said to be deep in the money, it represents the strike price to be lesser than Rs. 750 than the Underlying asset, and the reverse situation is known for the Put Option.

Intrinsic Value

The essential aspect of this option type is its significant Intrinsic Value. To assess the value of a call option, you would have to minus the strike price from the Market price of the Underlying Asset. And, for the put option, you would have to add the strike price and the underlying asset price.

With the call option moving deeper in the money, its delta will move toward 100%. At this delta, every changing point in the price of the underlying asset will be equal. And, simultaneously, the option price changes in a similar direction.

For this specific reason, deep in the money options are appropriate for investors who are Investing for the long-term. Thus, the investment in option makes it similar to investing in any other underlying asset, except the holder of the option will get the advantages of limited risk, lower Capital outlay, greater profit, and more.

Example of Deep in the Money

Let’s take a deep in the money example here. Suppose an investor purchase June call option for ABC stock with a strike price of Rs. 175 on 1st January 2020. On the same date, the closing price for this stock was Rs. 210.

And, the strike price for June call options on this day was: Rs. 150, Rs. 175, Rs. 210, Rs. 225 and Rs. 235. Since the term of the option is more than 90 days, the call option with the strike price of Rs. 150 (as in two strikes lesser than Rs. 210) will be deep in the money option.