What does this term mean?
Mean the option is very likely to be exercised at expiration.
The time value is insignificant in comparison to the intrinsic value.
Assume the stock is at 50: - 55 call is out of the money - 50 call is at the money - 45 call is in the money - 30 call is deep in the money Deep calls/puts have the most delta and move most like the underlying.
Yeah except the “deep” is like the “I am in love with her” vs. “I am deeply in love with her”. Reasonable people can disagree on when the “deep” is appropriate.
Aside: Can the term be used for knock-out options?
Most options traders think of DEEP as having a high delta so that the option moves pretty much even with the underlying.
That’s an interesting question, DarienHacker. I’ve never heard “deep-ITM” term used specifically with knock-out options to relfect a very low chance of hitting the barrier but I don’t see why it can’t be used.
You would need to be pretty careful about that because it’s ambiguous but a knock-out option has a delta so if you like those |Delta| > 0.9 -type definitions of “deep” you could do it.