Deep In The Money Options
Deep In The Money Call Option
Deep In the Money Put Option
Definition of "Deep In the Money":
An option is said to be "deep in the money" if it is in the money by more than $10. This phrase applies to both calls and puts. So, "deep in the money" call options would be calls where the strike price is at least $10 less than the price of the underlying stock. Put options would be "deep in the money" if the strike price is at least $10 higher than the price of the underlying stock.
Example of Deep in the Money Calls and Puts:
Suppose YHOO is at $40 and you think YHOO's stock price is going to go up to $50 in the next few weeks. If you bought the YHOO $40 calls and then in the next few days you find out you were right and YHOO is at $52, then your $40 calls are in the money $12 and they would be considered deep in the money call options.
Likewise if you had a YHOO $55 put, then this put would be considered deep in the money when YHOO is at $40, but once YHOO climbed to $52, it is still in the money, but it would not be considered deep in the money.
The advantage of buying deep in the money calls and puts is that their prices tend to move $1 for $1 with the movement of the underlying stock. So, if you are absolutely certain that the price of the underlying stock is going to move a lot and move quickly, then you will earn a higher percentage return trading these calls and puts than trading the stock itself.
Calls and Puts Trading Tip: Why is this distinction between ITM calls and puts and a DEEP ITM calls and puts? The first thing to understand is that options with strike prices near the price of the underlying stock tend to have the highest risk premium or time-value built into the option price. This is compared to deep in the money options that have very little risk premium or time-value built into the option price.
For example, if YHOO is at $40, the current month $40 call might be priced at $1.50. That $40 call is ATM so its intrinsic value is $0 but traders are willing to bet $1.50 that the price of YHOO will move up to and higher than $41.50 which is the breakeven point. The YHOO $30 call however, might be price at $10.25. The $30 call is obviously ITM $10 so the risk premium or time-value is only $0.50.
Here are the top 10 option concepts you should understand before making your first real trade: