Should I Buy Deep In The Money Options? A Trader’s Guide to Maximizing Profits

What Are Deep In The Money Options, Anyway?

Hey folks! I’ve been trading options for several years now and one question I get asked a lot is whether deep in the money options are worth buying. It’s a strategy that’s often overlooked by beginners but can be incredibly powerful when used correctly.

Deep in the money (DITM) options are options with strike prices significantly below (for calls) or above (for puts) the current market price of the underlying asset. The key characteristic of these options is that they possess substantial intrinsic value with minimal extrinsic or time value. They’ve already “made it” in a sense – they’re already profitable if exercised immediately.

For example, if Apple is trading at $200, a call option with a $160 strike price would be considered deep in the money The intrinsic value would be $40 per share ($200 – $160)

Why Deep In The Money Options Might Be Right For You

Before diving into whether you should buy deep in the money options, let’s talk about what makes them unique compared to at-the-money or out-of-the-money options:

The Delta Advantage

DITM options have a nearly 100% delta, which is a huge advantage. Delta measures how much an option’s price changes when the underlying stock moves $1. With a delta close to 1 (or 100%), every dollar movement in the stock causes an almost equal dollar movement in your option value.

This means:

• Your option behaves almost like owning the stock itself
• Less volatility in your option’s value
• More predictable price movements

Lower Risk Profile

One thing I really love about DITM options is their reduced exposure to time decay (theta). Since most of their value is intrinsic rather than extrinsic, they don’t lose value as quickly as time passes compared to other options.

Leverage Without the Typical Option Risks

Deep in the money options give you leverage similar to other options but with less risk of total loss. You can control the same amount of stock with less capital while having greater certainty about the outcome.

When Should You Buy Deep In The Money Options?

From my experience, there are several scenarios where DITM options make a lot of sense:

1. Long-term bullish outlook: If you’re confident in a stock’s long-term prospects but don’t want to tie up all your capital, DITM calls are excellent. They’re particularly good for a long-term investing strategy.

2. Risk management: When you want exposure to a stock but with defined risk parameters.

3. As stock replacements: Instead of buying 100 shares of an expensive stock, you can use a DITM call to mimic stock ownership with less capital.

4. Dividend capture without full capital outlay: Though you won’t receive dividends directly as an options holder, you can potentially benefit from dividend-related price movements.

Real-World Example of DITM Options Strategy

Let me share a practical example from my own trading:

Imagine Company XYZ is trading at $210 per share. You’re bullish on the company but don’t want to spend $21,000 to buy 100 shares.

Instead, you could buy a DITM call option with a $150 strike price for around $65 per share ($6,500 total). This gives you control over 100 shares while risking less capital. If the stock rises to $230, your option would increase by approximately $20 per share, giving you a profit of $2,000 on a $6,500 investment (about 30% return), whereas the stock investment would yield only a 9.5% return.

This leverage aspect is what makes deep in the money options so attractive to me and many other traders.

Potential Drawbacks to Consider

Of course, there are always downsides to any strategy, and I wouldn’t be giving you the full picture without mentioning them:

Higher Premiums Required

DITM options are more expensive in absolute terms than at-the-money or out-of-the-money options because of their high intrinsic value. You’ll need more capital upfront compared to other option strategies.

Limited Upside Compared to Other Options

While DITM options provide more stability, they offer less explosive percentage returns compared to cheaper out-of-the-money options (though with much higher probability of profit).

Missing Out on Dividends

Unlike stockholders, option holders don’t receive dividends. If dividend income is important to your strategy, this is a drawback worth considering.

Key Factors to Evaluate Before Buying DITM Options

Before jumping into DITM options, I always consider these factors, and you should too:

1. Expiration Date Selection

For DITM options, I prefer longer-term expiration dates (LEAPs – Long-term Equity Anticipation Securities) to minimize the impact of time decay. The further out your expiration, the more your option will behave like stock ownership.

2. Liquidity Considerations

Always check the option’s open interest and bid-ask spread. Less liquid options can be difficult to exit at a fair price.

3. Implied Volatility

Even DITM options aren’t completely immune to implied volatility changes. During high IV periods, premiums may be inflated, making them less attractive purchases.

Comparing DITM Options to Other Strategies

To help you decide if deep in the money options are right for your trading style, let’s compare them to other common strategies:

My Personal DITM Options Strategy

Here’s how I personally approach DITM options in my trading:

1. I look for stocks I’m bullish on for the medium to long term
2. I check for options with deltas of 0.80 or higher
3. I choose expiration dates at least 6 months out, often longer
4. I aim for strike prices that are 15-20% below the current stock price
5. I always calculate my break-even point (strike price + premium paid)
6. I compare the cost of the option to buying the stock outright to ensure the leverage makes sense

This approach has worked well for me, especially in strong bull markets or when I have high conviction on specific stocks but want to diversify my capital across multiple positions.

When NOT to Use DITM Options

There are definitely times when deep in the money options aren’t the best choice:

• When you’re looking for quick, explosive returns (OTM options might be better)
• For very short-term trades (the premium paid may be too high relative to potential gains)
• In extremely illiquid options markets
• When the underlying stock is very stable with minimal expected movement
• If you’re specifically seeking dividend income

Tips for Success with DITM Options

If you decide to incorporate deep in the money options into your trading strategy, here are some tips that have helped me succeed:

Manage Your Position Size

Even though DITM options are less risky than other options, they still carry more risk than owning the stock outright. I never put more than 5% of my portfolio in any single options position.

Have an Exit Strategy

Before entering a DITM position, know your profit target and stop-loss levels. I usually aim for a 20-30% profit on these positions and cut losses at 15%.

Consider Rolling Forward

If your outlook remains bullish but expiration is approaching, consider rolling your position forward to a later expiration date to avoid accelerating time decay.

Watch for Dividend Dates

Since option holders don’t receive dividends, be aware that the underlying stock price typically drops by approximately the dividend amount on the ex-dividend date.

Real Questions from My Readers

I’ve received these questions from readers of my trading blog, and they might help answer your concerns too:

Q: Aren’t deep in the money options too expensive?

A: They require more capital than other options, but they’re actually cheaper than buying the equivalent amount of stock outright. The leverage aspect is what makes them valuable.

Q: What’s better – deep in the money calls or deep in the money puts?

A: It depends entirely on your market outlook. DITM calls for bullish views, DITM puts for bearish views. The mechanics and advantages are similar for both.

Q: How deep is “deep” enough?

A: I typically look for options with a delta of 0.80 or higher, which generally means strike prices that are at least 15-20% below the current price for calls (or above for puts).

My Final Verdict: Should You Buy Deep In The Money Options?

So, should you buy deep in the money options? Based on my experience and understanding of their mechanics, I believe they’re an excellent strategy for traders who:

1. Want stock-like exposure with less capital
2. Prefer higher probability trades with more predictability
3. Are looking for longer-term positions (several months to years)
4. Have a strong directional conviction but want to limit downside risk
5. Understand options mechanics and the trade-offs involved

Deep in the money options truly shine as a long-term investing strategy. They provide significant leverage while maintaining a high probability of profit compared to other option strategies.

However, they aren’t suitable for everyone. If you’re looking for “lottery ticket” type returns or very short-term trades, other strategies might better suit your goals.

For me personally, DITM options have become a core part of my trading toolkit, especially in markets where I have strong convictions but want to manage risk and keep capital available for multiple opportunities.

Have you tried trading deep in the money options? I’d love to hear about your experiences in the comments below!

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The 3-5-7 rule is a risk management strategy in trading that sets guidelines for exposure and profit. It recommends risking no more than 3% of your capital on a single trade, limiting total risk across all open positions to 5% of your capital, and aiming for a minimum profit target of 7% on winning trades, often implying a high risk-reward ratio.