Deep In The Money
Candlefocus EditorDeep in the Money options also have a high intrinsic value relative to their extrinsic (time) value because the strike price is far above or below the current market price. This means that a lower investment is required to realize a given profit than would be the case in normal options that have a higher extrinsic value and a lower intrinsic value.
Deep in the Money options are generally exercised early, particularly when they are of the American style (For American style options the buyer of the option has the right to exercise the option at any point between the date of purchase and the expiration date) This is because the intrinsic value remains the same regardless of the date at which the option is exercised and thus traders stand to make a greater return if they exercise the option early, as opposed to waiting for the expiration date. Deep in the money options can also be used for hedging purposes as their intrinsic value ensures minimal losses for the trader in the event of a swift shift in the price of the underlying asset.
In conclusion, Deep in the Money options are a compelling type of derivatives instrument due to their high intrinsic value and low investment requirement which can lead to significant gains if exercised at the right time. Additionally, they can also be used for hedging purposes making them an attractive choice for both speculative and conservative investors.