Deep In The Money


What is Deep In The Money?

An option deep in the money has an exercise price, or exercise price, significantly lower (for a call option) or higher (for a put option) than the market price of the underlying asset . The value of such an option is almost all of the intrinsic value and the minimum premium.


In monetary options

Understanding money deep down

The Internal Revenue Service (IRS) deeply defines monetary options as any option whose term is less than 90 days and whose strike price is less than a strike during the highest available stock or an option whose the duration is greater than 90. days with a price less than twice the highest price available.

An option is said to be “deep in the money” if it is in the money over $ 10. For options, a call and put can be in the money. Therefore, if a call option is “deeply buried”, it means that the strike price is at least $ 10 lower than the underlying asset, or $ 10 higher for a put option. For low-priced stocks, $ 5 or less may be the level needed to get to the bottom of the money. These deep-silver options have a very high delta level, which means that the options will evolve almost at the same rate as the underlying asset.

The most important feature of this type of option is its considerable intrinsic value. To calculate the value of a call option, subtract the exercise price from the market price of the underlying asset. For a put option, you would add the strike price to the price of the underlying asset.

As a call option approaches currency, its delta will approach 100%. At this delta, each point change in the price of the underlying assets causes an equal and simultaneous option price change in the same direction.

For this reason, deep-in-the-money options are a great strategy for long-term investors, especially when compared to money and out-of-money (OTM) options. Consequently, investing in the option is similar to investing in the underlying asset, except that the holder of the option will have the benefits of a reduction in capital expenditure, a limited risk, an effect leverage and higher profit potential.

Key points to remember

  • At the bottom of monetary options, the exercise prices are significantly higher or lower than the option price.
  • These are great investments for long-term investors as they have a delta of almost 100%, which means that their price changes with every change in the price of the underlying asset.
  • The downside to the depth of the monetary options is that there is a possibility that the stock will move in the opposite direction and decrease profits or amplify losses.

Some considerations

Since options cost less to buy than the underlying asset, deep money options allow the investor to benefit from the same or almost the same thing from the movement of a stock as the holders (or short sellers) of the actual action. While the deep money option involves lower capital expenditure and lower risk; they are not without risk.

Because options have a limited life, unlike stocks, the investor still needs the underlying stock to move in the desired direction (higher for calls and lower for put options) in the period specified for making a profit.

There is always the possibility that the stock moves in the opposite direction to the desired direction, making the options less money or even out of money. In this case, the intrinsic value decreases or disappears completely, leaving only the premium, which is at the mercy of the temporal decrease.

Deep in the Money example

Suppose an investor buys a call option on ABC stock in May with an exercise price of $ 175 on January 1, 2019. The closing price for ABC was $ 210 on January 1, 2019 and the prices d ‘exercise options in May the same day were $ 150, $ 175, $ 210, $ 225 and $ 235. Because the term of the option is more than 90 days, the call option with an exercise price of $ 150 (two strikes of less than $ 210) is a deep option in the money.

Leave a Comment

Your email address will not be published. Required fields are marked *