Trading Deep In The Money Options- Risks to consider

Trading-Deep-In-The-Money-Options

For many, the term options trading is synonymous with potentially catastrophic risk and downside. However, there are some options strategies that can help limit potential risks, provide decent opportunities to make money, and cost less than buying the stock outright. If that interests you, then it’s time to get acquainted with buying phone calls.

What is Deep in the Money?


According to Investopedia, a deep in the money option has an exercise, or strike price, significantly below (for a call option) or above (for a put option) the market price of the underlying asset. The value of such an option is nearly all intrinsic value and minimal premium.

Understanding Deep in the Money

The Internal Revenue Service (IRS) defines options in detail as any option with a term of less than 90 days, the exercise price of which is one exercise price below the highest available share price, or an option with a term of more than 90 days. Days with a price less than two beats than the highest available stock price.

An option is said to be “deep in the money” if it is in the money for more than $ 10. In the case of options, both a call and a put can be included in the money. When a call option is “very in the money” it means that the strike price is at least $ 10 below the underlying asset or $ 10 higher for a put option. For stocks with lower prices, $ 5 or less can be the level it takes to invest a lot of money. Options that are deep in the money have a very high delta level, which means that the options are trading at almost the same level as the underlying asset.


The most important characteristic of these types of options is their considerable intrinsic value. In order to calculate the value of a call option, the strike price must be subtracted from the market price of the underlying asset. With a put option, you would add the strike price to the price of the underlying asset.

As a call option gets deeper into the money, its delta approaches 100%. In this delta, every point change in the price of the underlying leads to a simultaneous and equal change in the option price in the same direction.


For this reason, deep-in-the-money options are a great strategy for long-term investors, especially when compared to OTM (at the money and out of the money) options. Therefore, investing in the Option is similar to investing in the Underlying, except that the option holder has the benefits of lower capital outlay, limited risk, less leverage, and higher potential for profit.

How Deep in the money calls works?

Deep in the money, calls work much like a traditional stock purchase. As the delta approaches 100%, the option will behave exactly like the underlying asset, which means that buying a call option with a lot of money is basically the same as buying the underlying asset outright, but at a reduced price.

When to use Deep in the money

A deep call is a great strategy for specific investors and investment goals. Consider adopting a money-in-depth calling strategy if:

  • Are selling the underlying stock: By selling the cash fund option against your shares, you have the opportunity to earn an additional time premium on the shares you want to sell independently.
  • Want to protect your gains: If you fully own the stock and are concerned about losing value, you can use a deep protection call, although there is a chance of a loss here.
  • Want a stock replacement strategy: You can buy a call option with a lot of money instead of buying stocks outright at a discount.
  • You are looking for income: as long as the underlying remains above the strike price, you will know exactly how much money you can make when it expires.

Reasons you should buy deep in the money

For most options traders, the pros outweigh the cons when it comes to digging deep into money calls. Check out these eight reasons why you should use this strategy:


Low capital investment: you spend less on the options contract for an underlying asset than if you bought the shares directly on the stock market of the same company. Because you’re spending less upfront, you have more cash in your pocket to diversify and make additional investments.

Limited Risk: There is only a limit to the amount of money you can lose. Unlike other option strategies where you can potentially lose an unlimited amount of money, the deep money call protects your downsides.

Leverage: You can use your options contract against the shares of the actual underlying asset to further increase your earnings.

No Limit: There is no technical limit to the amount of money you can win. Therefore, there is excellent profit potential due to the depth of the money calls.

Positive Ratio: The ratio between losses on the downside and gains on the upside is weighted in your favor. You can gain much more than you would lose if stocks move in an adverse direction.

Stock-like behavior: These high-delta calls result in option contracts that behave like normal stocks. This makes them much less volatile and easier to manage.

Single position: You only work from a single position, since the action and the options work in parallel and not from two positions, as is the case with a covered call, where you have to manage both the call and the put.

Income: You can earn a small income with this strategy. While the rewards are generally low, the risks are also low. By effectively planning your deep money calls, you can calculate how much money you can make before you buy the options and make a profit.

Trade deep in the money options

In times of high volatility, buying deep-in-the-money (ITM) options is a great way to implement strategies to trade directional options.

This is because the high implied volatilities will eventually revert to a more normal level of volatility. In this case, the at-the-money (ATM) and “out-of-the-money” (OTM) options used will be affected.

In short, to do the perfect options trading that will get you 100% in one month, you will need the following

  • A swing trade: an option that you will hold for up to a week or a month.
  • A deep-in-the-money option with a delta above 0.60 so it moves almost parallel to the underlying stock
  • An event that will occur within a period of one month or less.

Risks to consider

Before buying deep in the money options, there are some risks to consider:

  • Stock reversal: If the underlying asset moves in the wrong direction, the intrinsic value of your options contract will decrease and you will have the premium deteriorating.
  • Limited Lifespan: Shares must be above the strike price before your option expires. Otherwise, you will not get any money from the contract.
  • Potential Percentage Loss: While you probably won’t lose a lot of money if your stocks go south, you will lose a large percentage of your investment, which is not ideal.

Conclusion

Using a deep call can be a powerful strategy for risk-averse investors who are still interested in taking advantage of option trading opportunities. With so many good reasons to go with this strategy, you will only leave profits on the table if you don’t give it a shot.

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