Deep In The Money

Deep in the money (abbreviated as DITM) is a term used in options trading to describe an option whose strike price is significantly lower than the current market price of the underlying asset. This means that the option is very likely to be exercised, as the holder would make a profit by doing so.

For example, if a stock is trading at $100 and an option with a strike price of $50 is purchased, the option is said to be deep in the money. This is because the holder of the option would make a profit of $50 if they exercised the option, as they would be able to buy the stock for $50 and then sell it for $100.

The opposite of deep in the money is out of the money (abbreviated as OTM). An option is said to be out of the money when the strike price is significantly higher than the current market price of the underlying asset. This means that the option is unlikely to be exercised, as the holder would lose money by doing so.

For example, if a stock is trading at $100 and an option with a strike price of $150 is purchased, the option is said to be out of the money. This is because the holder of the option would lose $50 if they exercised the option, as they would be able to buy the stock for $100 and then sell it for $150.

The term "deep in the money" is also used to describe a stock that is trading significantly above its intrinsic value. For example, if a stock is trading at $100 and its intrinsic value is $50, the stock is said to be deep in the money. This is because the stock is trading at a price that is significantly higher than its fair value.

The term "deep in the money" is important for options traders because it helps them to determine the potential profitability of an option. An option that is deep in the money is more likely to be exercised, and therefore has a higher value.