Deep in the Money

Deep in-the-money (Deep ITM) options have strike prices far from the current stock price, giving them substantial intrinsic value and making them behave almost exactly like stock positions. For calls, deep ITM means strikes significantly below the stock price. For puts, it means strikes significantly above the stock price. These options have deltas approaching 1.00 (or -1.00 for puts), minimal extrinsic value, and very low risk of expiring worthless. While expensive upfront, deep ITM options serve specific purposes like stock replacement strategies, guaranteed assignment, or capturing dividends, making them valuable tools for certain situations despite being ignored by most income traders.

Defining Deep ITM

While “deep” is subjective, general guidelines exist:

Deep ITM Calls: Strike at least 10% below stock price

  • Stock at $100, strikes $90 and lower
  • Delta typically 0.80-0.95+
  • Mostly intrinsic value

Deep ITM Puts: Strike at least 10% above stock price

  • Stock at $100, strikes $110 and higher
  • Delta typically -0.80 to -0.95+
  • Mostly intrinsic value

The deeper ITM, the more stock-like behavior.

Deep ITM Value Composition

Deep ITM options are almost pure intrinsic value:

Example: Deep ITM Call

Stock at $100, $80 call trading at $20.15:

  • Intrinsic Value: $20.00 (100%)
  • Extrinsic Value: $0.15 (0.75%)
  • Delta: 0.95
  • Movement: $0.95 per $1 stock move

Compare to ATM $100 call at $3.00:

  • All extrinsic value
  • 0.50 delta
  • Much more sensitive to Greeks

Why Trade Deep ITM

Specific strategies benefit from deep ITM options:

Stock Replacement Strategy

Instead of buying 100 shares at $100 ($10,000):

  • Buy $80 deep ITM call for $20.15 ($2,015)
  • Controls same 100 shares
  • 80% less capital required
  • Similar profit potential
  • Defined maximum loss

Benefits:

  • Capital efficiency
  • Limited downside
  • No margin calls
  • Maintain upside exposure

Drawbacks:

  • No dividends
  • Time decay (minimal)
  • Expiration deadline
  • Wider bid-ask spreads

Synthetic Positions

Create stock-like exposure:

  • Long deep ITM call + Short deep ITM put = Synthetic long stock
  • Short deep ITM call + Long deep ITM put = Synthetic short stock
  • Useful for portfolio management
  • Tax planning strategies

Deep ITM Greeks Profile

Extreme Greek characteristics:

Delta: Near maximum

  • Deep ITM calls: 0.85-1.00
  • Deep ITM puts: -0.85 to -1.00
  • Moves almost penny-for-penny

Gamma: Very low

  • Little acceleration
  • Stable delta
  • Predictable movement

Theta: Minimal decay

  • Small extrinsic value
  • Low time decay risk
  • Can hold longer

Vega: Nearly zero

  • IV changes barely matter
  • Focus on intrinsic movement
  • Stable pricing

Deep ITM for Assignment

Sellers use deep ITM for guaranteed outcomes:

Covered Call Exit Strategy

Own stock at $80, now at $100, sell $85 call:

  • Deep ITM by $15
  • Near-certain assignment
  • Locks in $5 profit + premium
  • Tax timing control

Cash Secured Put Entry

Want stock at discount, sell $110 put with stock at $100:

  • Deep ITM by $10
  • Very high assignment probability
  • Effective entry at $110 – premium
  • Only if comfortable with price

Early Exercise Risk

Deep ITM options often exercise early:

Dividend Considerations

$80 call with stock at $100, $0.50 dividend tomorrow:

  • Extrinsic value: $0.15
  • Dividend exceeds extrinsic
  • High probability of early exercise
  • Call sellers should be prepared

No Extrinsic Value

When extrinsic approaches zero:

Deep ITM Liquidity Issues

Trading challenges with deep ITM:

Wide Bid-Ask Spreads:

  • $80 call: $19.90 bid / $20.40 ask
  • $0.50 spread vs $0.05 for ATM
  • Use limit orders
  • Consider market makers

Low Volume:

  • Fewer contracts trade
  • Harder to enter/exit
  • May need patience
  • Check open interest

Managing Deep ITM Positions

Different approach than regular options:

For Long Positions

  • Hold like stock investment
  • Less active management needed
  • Monitor extrinsic value
  • Exercise or sell near expiration

For Short Positions

  • Expect assignment
  • Prepare for early exercise
  • Have exit plan ready
  • Don’t fight the inevitable

Deep ITM Scanning

Finding deep ITM opportunities:

For Stock Replacement

Screen for:

  • High-quality stocks
  • Deep ITM calls with 6+ months
  • Minimal extrinsic value
  • Tight spreads if possible
  • Compare to stock purchase

For Covered Calls

Look for:

  • Positions ready to exit
  • Deep ITM with good premium
  • Acceptable sale price
  • Tax timing considerations

Common Deep ITM Mistakes

Paying High Extrinsic: Not checking value breakdown Ignoring Spreads: Market orders cost fortune Fighting Assignment: Surprised when exercised Wrong Expiration: Too short for strategy

Deep ITM Decision Framework

Before trading deep ITM:

  1. Calculate extrinsic % of total premium
  2. Check bid-ask spread impact
  3. Verify volume/liquidity adequate
  4. Compare to stock transaction
  5. Plan for assignment if short
  6. Consider early exercise risk
  7. Factor in dividends if applicable

Capital Efficiency Example

Comparing strategies with $10,000:

Buy Stock:

  • 100 shares at $100
  • Full $10,000 deployed
  • Unlimited risk/reward

Buy Deep ITM Calls:

  • 5 contracts of $80 calls at $20
  • Same $10,000 controls 500 shares
  • Maximum loss defined
  • 5x leverage achieved

Risk: Options expire, stock doesn’t

Key Takeaways

Deep In The Money:

  • Strikes far from current price
  • High intrinsic value
  • Behave like stock positions
  • Delta approaching ±1.00
  • Minimal time decay
  • High assignment probability
  • Used for stock replacement

Deep ITM options bridge the gap between options and stock ownership. While most income strategies focus on OTM options, deep ITM serves specific purposes like capital efficiency, guaranteed assignment, or tax planning. Understanding deep ITM dynamics helps you recognize when these expensive options make sense and when to avoid their unique challenges like wide spreads and early exercise risk.