What Are Deep in the Money Options?
Deep in the money options possess an exercise or strike price that is significantly below the market price for call options or above for put options. These options are mainly composed of intrinsic value with minimal extrinsic value. Their deltas are close to 1.00, signifying that their price movement closely aligns with the price movement of the underlying asset.
Deep in the money options stand in contrast with options deep out of the money, which exhibit minimal intrinsic value and also tend to have minimal extrinsic value. Their deltas are typically close to zero.
Key Advantages of Deep in the Money Options
- High Intrinsic Value: The strike prices are significantly different from the underlying asset’s market price, focusing more on intrinsic than extrinsic value.
- Nearly 100% Delta: The near par delta implies that the option’s price changes proportionately with the underlying asset’s price.
- Early Exercise: American-style deep in the money options can often be exercised early, making them attractive for experienced traders.
Understanding Deep In the Money Options
According to typical definitions, an option qualifies as
Related Terms: options, intrinsic value, extrinsic value, delta, leverage, in the money, at the money, out of the money, time decay
References
- Internal Revenue Service. “Publication 550: Investment Income and Expenses”.
Get ready to put your knowledge to the test with this intriguing quiz!
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## What does "Deep In The Money" (DITM) signify in the context of options trading?
- [ ] An option that is barely in or out of the money
- [ ] An option that has expired
- [x] An option with a strike price significantly above (for puts) or below (for calls) the market price of the underlying asset
- [ ] An option you cannot exercise
## For a call option, when is it considered "Deep In The Money"?
- [ ] When the stock price is close to the strike price
- [ ] When the option is near its expiration date
- [ ] When the stock price is above the strike price
- [x] When the stock price is significantly above the strike price
## For a put option, when is it considered "Deep In The Money"?
- [x] When the stock price is significantly below the strike price
- [ ] When the stock price is above the strike price
- [ ] When the option is at its expiration date
- [ ] When the stock price is equal to the strike price
## Which of the following is a characteristic of a "Deep In The Money" call option?
- [ ] High time value
- [ ] Longer expiration period
- [x] High intrinsic value
- [ ] Zero intrinsic value
## Why might an investor choose a "Deep In The Money" option?
- [x] Reduced risk of the option expiring worthless
- [ ] Larger time value component
- [ ] Immediate protection from future price changes
- [ ] Access to dividends of the underlying asset
## How does "Deep In The Money" status affect an option's premium?
- [ ] Increases the time value component of the premium
- [x] Increases the intrinsic value component of the premium
- [ ] Decreases both intrinsic and time value components
- [ ] No effect on the option’s overall premium
## What impact does implied volatility have on "Deep In The Money" options compared to "Out of The Money" options?
- [x] Lesser impact
- [ ] Greater impact
- [ ] No impact at all
- [ ] They impact similarly
## Which type of option would have the highest intrinsic value assuming the underlying asset's price remains static?
- [ ] Out-of-the-money option
- [ ] At-the-money option
- [x] Deep in-the-money option
- [ ] Near-the-money option
## What's a primary disadvantage of buying "Deep In The Money" options?
- [ ] Higher likelihood of expiring worthless
- [ ] They cover less price movement compared to Out of The Money options
- [x] Higher initial cost compared to Out-of-The-Money options
- [ ] Limited leverage opportunities
## When trading "Deep In The Money" options, investors are mostly speculating on:
- [x] Stability or minor movements in the underlying asset's price
- [ ] Major price movements of the underlying asset
- [ ] High levels of market volatility
- [ ] Long-term value investments in the underlying asset
