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Deep in the Money

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In the derivative market, deep in the money is an option contract that has a strike price significantly below or above the current market price of the underlying security.

A deep in the money option contract is nearly all intrinsic value and minimal extrinsic value or time value. This means it has significant intrinsic value.

You can calculate the intrinsic value of a call option by subtracting the strike price from the underlying asset’s current market price. In case of a put option, the intrinsic value is calculated by subtracting the current market value of the underlying asset from the option’s strike price. The larger the spread between these two values, the deeper the option goes in-the-money.

In the option market, the concept of moneyness helps traders and investors to understand the position of an underlying asset in relation to the option’s strike price.

A call option is deep in the money, when the strike price is significantly less than the market price of the underlying asset. Likewise, a put option is said to be deep in the money, when the underlying asset’s market price is significantly lower than the strike or exercise price. In both the cases they have high intrinsic value.

In the case of american style, many traders will prefer to close out deep in the money options by exercising them early. 

In the case of European style, option contracts can be exercised when they expire. However, traders can always square off their position before expiry by selling their rights or contracts in the open market.

For example: suppose call option contracts of XYZ company limited have the following strike price when the market price is Rs. 100.

  • 50
  • 75
  • 100
  • 125
  • 135
  • 150

In this case, the call option with a strike price of Rs. 50 is a deep in the money option.

In our above example, let us assume that it’s a put option. With the above strike price, in case of a put option contract, Rs. 150 is deep in the money option.

An option that is deep in-the-money will trade at a significant premium based on time value, supply and demand in the market.

You can also trade at-the-money (ATM), in-the-money (ITM) or out-of-the-money (OTM) options.